Classification of Forex Analysis Methods

Graphical methods

The meaning of graphical methods is simple: you should take the source data of rates or trade volumes and on their basis build different diagrams – basic or more complex ones. Usually graphical methods imply a recurrence in price behavior, in other words that past behavior will repeat itself in the future. Most graphical methods were developed quite a long time ago so they don’t require a trader to have complex and expensive software applications to use. Graphical methods of analysis contain classical market models: trend lines, support and resistance lines, channels, candlestick charts, points and figure charts and many others. The Elliott wave principle could also be classified under this type of method although there is also a separate wave theory (which we will describe later in more detail).

Digital filters and mathematical approximations

These methods were invented a long time ago but were seldom used until 20 years or so ago when personal computers started to become widely distributed. Today, any trader can use these methods, which not long ago were only available to geniuses or owners of analytical centres, back in the light-hearted 1960s.
There are several categories of digital filters:

• Trend indicators display the stability level of the main market trend and its direction. These include Moving Averages, Directional Movement, Parabolic Kaufman Efficiency Ratio and others.
• Indicators of volatility, in other words, indicators of market inconstancy. These filters display the strength of movement of the market that do not depend on the main trend; they include Standard Deviation, Bollinger Bands and others.
• Indicators of acceleration or indicators of momentum. This class of methods is devoted to determining the speed of change of a current price. It includes Momentum, Relative Strength Index (RSI) and Price Rate-of-Change (ROC), Stochastic Oscillator and others.
• Methods of cycle stage determination with the help of Fourier analysis or building of trigonometric
  curves.
• Methods of volume study in order to determine the strength of a market movement, as the volume of deals is larger, the more confident investors are in the current trend. Confidence makes them follow the trend and that’s what makes the trend true.
• Indicators of support and resistance levels defining the moment when and at what level the current move will stop. There are Moving Average Envelopes and Fibonacci Retracements, among others.

Probabilistic methods

These methods use the methodology of probability theory and mathematical statistics in order to determine the direction and strength of a trend, the probability of a correction and so on.

Market structure theories

These methods are based on the statement that price movements have a definite structure which allows a trader to predict their future form. Elliot waves, fractals and some others are referred to in this category.

Others

It goes without saying that there are hundreds of methods that can’t be attributed to the one definite category or can’t be categorized at all. There are astrological and biorhythmic methods, trading systems based on cycles of the Moon, and there are already brokers who provide this sort of information in real-time.