FP Markets

Technical Analysis: Exchange Rate Essentials

As the world of the internet becomes more populous, more and more blogs, content, videos, podcasts, and other professional materials related to investments are emerging. Of course, there is nothing wrong with this; in the 21st century, the opportunities provided by the online world have brought the world of investments, the pleasure of learning, and its results to a wide audience in a very cost-effective way. We believe that professionalism and consumability go hand in hand, which is why we have prepared our current article, which we intend as the starting part of a series of articles.

Price Movements & Technical Analysis

Analyzing price movements is almost essential for understanding the basics of stock trading, as it can provide guidance and reference points for decision-making during trading. Can exchange rates be predicted? This question has been around as long as stock trading itself, and in the next part of our series, we will explore how we can draw conclusions about the future using tools based on historical price movements. However, it is important to note that there is a great deal of uncertainty surrounding future movements, so we can mainly increase our probabilities with the help of technical analysis. After fundamental analysis, which focuses on a company's activities and income-generating capabilities, technical analysis deals with analyzing exchange rates.

Are exchange rates random? If we start from financial theories and assume that the market is efficient, in theory, we would not be able to successfully use different analysis methods. However, in practice, it is often observed that there may be occasional mispricings in the market, and investor psychology can have short-term effects on the exchange rate, as well as some events often being exaggerated in either a positive or negative direction. There are also events that the market struggles to price in suddenly (e.g., the effects of the coronavirus pandemic, war).

So, an important question is how random exchange rate movements are because if this is not the case, different analysis methods can likely be used successfully. However, it is also important not to rely solely on technical analysis, although the methodology of technical analysis should certainly be part of a stock trader's "toolbox."

Key Concepts in Technical Analysis

Support and Resistance Levels

By observing past movements, we can identify levels where prices have turned or where a trend has stalled. Depending on where these levels are relative to the prices, they are called support and resistance levels. The likelihood of the prevailing trend reversing increases near these crucial levels, and in case of a breakthrough, they can reinforce the existing upward or downward trend.

Trend Lines

When analyzing price movements, the primary question is what trend the prices are following, either short-term or long-term. Of course, there can be shorter declining periods within a long-term upward trend. Here, it is mainly worth relying on trend lines, which are obtained by connecting the progressively rising lows or falling highs in the price chart. Trend lines work similarly to support and resistance levels, and in many cases, not only a single trend line but also a trend channel can be identified on the chart, meaning that the lows and highs within a trend form parallel lines.


In addition to trend lines and levels, various statistical tools are also available to us, with a wide range of options. For example, starting from the prices, we can easily create so-called moving averages, which look at the average price over different periods. Multiple moving averages can be applied to a single chart, and their crossovers can also send signals about the prevailing trend, and in many cases, moving averages can function as support and resistance levels as well.

Among the indicators, we can choose from numerous tools, such as those measuring the ratio of closing prices, as well as volatility and dispersion indicators, which can be used in technical analysis. Nowadays, these can be displayed using advanced charting software.

Tips for Effective Technical Analysis

When using indicators, support levels, and resistance levels in technical analysis, it's crucial to keep a few guiding principles in mind to maximize your success.

  1. Less is more: Avoid overloading your analysis with a multitude of indicators, as this can lead to conflicting signals and difficulty in interpreting the data. Focus on a few key indicators that work well for the specific instrument you are analyzing.

  2. Adapt to individual instruments: Different stocks or assets may respond differently to various indicators. Therefore, it's essential to optimize your trading strategies and indicator selection based on the unique characteristics of each instrument.

  3. Combine with fundamental analysis: While technical analysis is useful for identifying trends and market timing, it should not be the sole basis for your trading decisions. Combining technical analysis with fundamental analysis can provide a more comprehensive understanding of the asset, helping you make better-informed decisions.

  4. Practice and refine: As with any skill, practice and continuous refinement are essential in technical analysis. Develop a consistent approach to analyzing the market, learn from your successes and failures, and adapt your strategy as needed.

  5. Manage risk: Successful trading involves managing risk effectively. Set stop-loss orders and establish appropriate position sizes to protect your portfolio from potential losses. Be prepared to adjust your strategy if the market conditions change or if your analysis proves inaccurate.

  6. Stay updated: The financial markets are dynamic and ever-changing. Keep yourself informed about market news, economic developments, and other relevant factors that may impact the instruments you trade.

  7. Remain patient and disciplined: Successful trading requires patience and discipline. Stick to your strategy, avoid impulsive decisions, and always analyze the risks before entering a trade.

By keeping these tips in mind and continuously improving your technical analysis skills, you can increase your chances of success in the world of trading. Remember, this is just the beginning of a series of articles on this topic, and we will dive deeper into specific techniques, tools, and strategies in future articles.