In-Depth Guide to Forex Technical Analysis | K-line Patterns, Trend Analysis, Trading Indicators, and Practical System Building

1. Introduction: Why is technical analysis indispensable in the foreign exchange market?

The forex market operates 24/7, with massive trading volumes and extremely high liquidity. While fundamentals determine long-term direction, technical analysis is the only accurate tool for traders to enter and exit the market .

• Technical analysis reveals market psychology through price and volume.

• Support and resistance, trend lines, and indicators can transform chaotic market conditions into actionable patterns.

• Without technical analysis, traders often cannot find reasonable entry and exit points.

Real case: In 2019, EUR/USD fell from 1.15 to 1.09. The fundamental explanation was "weak eurozone + strong dollar", but the key breakthrough point of technical analysis (the 1.1300 support level was broken) was the real entry signal .

2. K-line patterns: the basis of market language

2.1 Single K-line Signal

• Hammer : A long lower shadow indicates a strong buying counterattack, often seen at the bottom.

• Shooting Star : The upper shadow line is long, showing the strength of the bears, and is often seen at the top.

• Long white candlestick/long black candlestick : trend continuation signal.

Case: During the 2020 pandemic crash, USD/JPY formed a typical hammer line near 101, and then started a rebound.

2.2 Combined K-line Patterns

• Engulfing : A reversal signal that often appears at the end of a trend.

• Harami : The trend may weaken.

• Morning/Evening Star : A strong reversal signal.

Practical advice: K-line patterns must be used in combination with support and resistance. The winning rate of using them alone is limited.

3. Support and Resistance: The “Invisible Wall” of Price

3.1 Definition of support and resistance

• Support : A level where buying is likely to emerge when prices fall.

• Resistance : A level where selling is likely to increase as prices rise.

3.2 Methods for Confirming Support/Resistance

1. Historical highs and lows.

2. Round numbers (1.1000 for EUR/USD, 150.00 for USD/JPY).

3. Moving average.

4. Fibonacci retracement.

3.3 Practical Examples

In 2017, USD/JPY repeatedly found support at 108, eventually forming a bottom structure, and then rose to 114. Support and resistance reflect the consensus of market funds.

4. Trend lines and channels: the key to following the trend

4.1 Trend Line Drawing

• Uptrend: Connect two or more low points.

• Downtrend: Connect two or more high points.

• The steeper the trend line angle, the more unstable it is.

4.2 Channel Transactions

• Parallel channel: Price oscillates between support and resistance.

• Oblique channel: prices move in line with the trend.

4.3 Practical Application

Traders can buy low and sell high in a trend channel, or follow the trend when there is a breakout.

5. Detailed explanation of common technical indicators

5.1 Moving Average (MA)

• Simple Moving Average (SMA) : Smoothes price movements.

• Exponential Moving Average (EMA) : More sensitive to recent prices.

• Golden Cross/Death Cross : Long-term trend signal.

5.2 MACD

• Fast/slow line crossover : trend reversal.

• Histogram zoom : trend strengthening.

5.3 RSI

• Overbought > 70, oversold < 30.

• Divergence signals are common in trend reversals.

5.4 Bollinger Bands

• Narrowing: The market is about to explode.

• Breakout: May start a trend.

5.5 ATR

• Measuring volatility for use in setting stop-loss orders.

Real-world experience: Indicators are not prediction tools, but auxiliary confirmation tools. Avoid relying on a single indicator.

6. Morphological Analysis: Price Geometry

• Head and Shoulders Top/Bottom : A classic reversal pattern.

• Double top/double bottom : price reversal signal.

• Triangle consolidation : breakthrough means trend continuation.

• Flag/Wedge : A pause in a trend.

Case: In 2018, EUR/USD formed a head and shoulders pattern and quickly dropped 400 points after breaking through the neckline.

7. Complete Trading System of Technical Analysis

7.1 Entry Conditions

• The trend direction is clear.

• The indicator resonates with the K-line pattern.

• Support/resistance levels provide reasonable stop losses.

7.2 Position Management

• Single risk ≤2%.

• Use ATR to determine stop loss distance.

7.3 Exit Strategy

• Fixed take profit: risk-return ratio 1:2.

• Trailing Take Profit: retain profit.

• Take profits in batches: reduce the risk of drawdown.

8. Practical Case Analysis

Example 1: EUR/USD trend following

The US dollar strengthened in 2021, and EUR/USD fell below the key support level of 1.2000.

• Technical signals: MA death cross + MACD death cross.

• Entry: short at 1.1980, stop loss at 1.2100, take profit at 1.1700.

• Result: The market reached the target and the profit was 280 points.

Example 2: GBP/USD reversal trade

Due to the impact of the epidemic in 2020, GBP/USD plummeted to 1.1400.

• K-line signal: hammer line + RSI oversold divergence.

• Entry: long order at 1.1500, stop loss at 1.1350.

• Exit: 1.2000, profit 500 points.

9. Technical Analysis and Psychological Discipline

• Greed : chasing highs after a breakout without setting a stop loss.

• Fear : Closing out as soon as support is reached and missing out on the market.

• Discipline : Technical analysis must be accompanied by strict implementation.

Psychological Tools:

• Write down your trading plan.

• Daily review errors.

• Accepting losses is a cost of doing business.

10. Risk Control and Multi-Time Frame Analysis

10.1 Risk Control

• The risk per order is ≤2%.

• Maximum drawdown ≤20%.

10.2 Multiple Time Frames

• Monthly/weekly charts: determine long-term trends.

• Daily line: Determine the main direction.

• 4H/1H: Execute entry point.

Example: Under the bullish trend on the daily chart, the pullback on the 1-hour chart provides a perfect buying opportunity.

11. Future Trends: Application of AI and Quantitative Analysis in Technical Analysis

• AI pattern recognition : automatically scan K-line and patterns.

• Big data indicator optimization : Select the best indicator parameters based on historical performance.

• Quantitative trading : converting technical analysis into algorithmic rules.

12. Conclusion

Technical analysis is the forex trader's "map and compass".

• K-line language reveals market psychology.

• Trends and indicators provide an operational framework.

• Risk control and psychology ensure long-term survival.

👉 Technical analysis is not about predicting the future, but about building a probabilistic advantage .

FAQ

Q1: Which indicator should a novice learn?
A1: Moving average, simple and intuitive.

Q2: Can technical analysis guarantee profits?
A2: No, but it can provide a probabilistic advantage.

Q3: How to avoid the abuse of indicators?
A3: Use a maximum of 2-3 indicators to avoid over-complication