Graphical analysis on Forex - what is it?

As you know, about 90% of the information about the world around us is obtained with the help of vision. At the same time, huge work on correcting errors of different levels of perception is done at a subconscious level, and we are aware of the already processed data array. In some cases, this can lead to a distortion of the true picture of reality. Therefore, training of perception is extremely important if the solution of the problem depends on the conclusions drawn from the received visual images.

In the Forex market, there is such a thing as Graphical Analysis. Graphical analysis is the interpretation of information on the for the chart in the form of graphic formations and the identification of repeated patterns in them, with the aim of making a profit.

Going down to the market analysis, one must understand that in contrast to a purely technical approach, the graphical analysis does not give us a complete answer to the question of how and what to do. First of all, this is due to the presence of more complex theoretical models, in some cases imperfect and possessing certain inaccuracies. For this reason, automating the location of graphic patterns is a much more voluminous task and creates the very fine line between technical and graphical analysis.

Therefore, it is important to use the right tools at work. By itself, the use of external tools contributes to the objective perception and eliminates most of the erroneous primary conclusions made on the basis of emotions. Thus, when it comes to graphical analysis, one can never fully rely on one’s own perception and one must always confirm their decisions with additional dimensions.

How does the graphical analysis work

As in the case of any other technical tools, the graphical analysis has the task of finding patterns in history. The simplest example is the trading level. If we draw a horizontal line in the places where the price is most concentrated, we will see characteristic movements near our level, as if the price “tests” it, without having the strength to break through the level and go further.

Rebounds on the chart are marked with circles. Noting such moments, we can assume that in the future the price will also be repulsed from the level. That is, we found a regularity. Of course, it’s impossible to blindly trade in this way, because we do not know when the price really rebounds from the level, and when it breaks it. But, we can quite use it as part of an objective view of the market.

The same goes for any other graphical analysis. We find a figure and check how the market reacted to it in the past, which followed the trend. For example, it is customary to assume that the figure “Head and Shoulders” indicates a reversal of the trend. Therefore, when we find such a figure on the chart, we assume that the price will reverse and go in the opposite direction.

There is a ton of varieties of shapes, as well as ways to determine them. Some prefer simpler graphic patterns and candlestick patterns. Some use the ratio of the golden proportion, building the so-called harmonic patterns, determining the reversal points with the help of Fibonacci lines. The principle is the same in all cases.

From all this, one can come to the conclusion that graphical analysis is not an accurate tool and for the most part is tied to the subjective perception of an individual trader. This is partly true, and there are even developments trying to confirm or refute this claim.

One of such developments is the Dejavu indicator, which builds the forecast, analyzing history. The starting point is taken between the two vertical lines (red dashed lines on the chart). With the help of Pearson’s correlation coefficient (Pearson’s CG), the indicator finds similar sections on the history and, in the presence of high correlation, makes a corresponding prediction of the future movement.

This example clearly shows how the amount and quality of input data can affect the final forecast. It is necessary to move the window a little, as the forecast changes cardinally. Therefore, it would be more indicative to analyze the quality of individual figures, which is the topic of a separate study.

Basic figures

Let’s consider existing figures and ways of their definition. The main base figures are a triangle and a channel.

• Triangle

There are two main types of triangles: expanding and convergent. An expanding triangle is a characteristic wave motion, each next peak of which is greater than the previous one.

Convergent triangle, on the contrary, is formed with a gradual approach to support and resistance levels.

The moment of entering the transaction is the penetration of the boundaries formed by the graphic figure.

Further, such a triangle can be divided into ascending and descending ones. In the first case, we are dealing with a horizontal level of resistance and an increasing level of support. Enter the deal when you break through the resistance level. In the second, on the contrary, we have a static support level and a downward resistance level. Accordingly, to enter the transaction you need to break through the support level.

Here you can also include the “Ascending wedge” and “Descending wedge” figures. It looks like this.

In this case, we are dealing with co-directional approaching support and resistance lines, they form a semblance of a triangle with a very sharp angle.

• Channel

A channel is a horizontal price movement between two parallel lines. The horizontal price channel is also called “flat”. That is, if the price moves in a horizontal channel, we can say that the market is flat.

An inclined channel can already indicate a trend movement. At the same time, the greater the angle of inclination, the stronger the movement.

A more concrete example is the pattern of a Double top or a Double bottom. As the name implies, a double vertex is a channel formed by two consecutive vertices and one minimum. A double bottom is a channel formed by two consecutive minima and one maximum.

The number of successive highs and lows does not have to correspond to two. They may well be three or more. In that case, we will deal with a triple top or triple bottom.

Since these are reversal figures, their consequence is a trend reversal. To enter it is necessary to penetrate the lower level in case of a double top and an upper level in case of a double bottom.

Conclusion

Despite decades of research by professional traders, the topic of graphical analysis has not yet been fully explored. Existing figures, though often found on the market, they do not have unified rules of construction, and therefore, in any case, there is some subjectivity in the analysis.
The formalization of clear rules and then the testing of patterns in practice is what is really worth starting your own research.

Regards, Michael

ForexTraderPortal.com