Forex Technical Analysis
Fundamental analysis and technical analysis are the two most necessary methods used in forecasting the currency market.
Technical analysis is used in the study of price movements. Historical currency data is used to forecast the direction of future prices. The principle of technical analysis is that all current market information is already reflected in the price of that currency. All that is required to make an informed trading decision is to study price action. Charts are the key instruments used by technical analysts to identify patterns and trends so trading opportunities can be found.
Essentially, technical analysts predict future currency moves by using historical data. There are several variations of how to analyse this historical data. To make technical analysis easier to understand, it is best to start with basic principles before moving onto the more complex.
Firstly, it is important to mention that technical analysis is based on three underlying principles:
Market Action Discounts Everything
This means that the actual price is a reflection of everything that is known to the market that could affect it. As an example, political factors, market sentiment and supply and demand. Price movements is the only concern for the technical analyst, not the reasons for the changes.
Prices Move in Trends
Technical analysis is used to identify patterns of market behavior which have long been recognized as significant. For many given patterns it is likely they will produce the expected results. There are also recognized patterns which repeat themselves on a regular basis which is very helpful.
History Repeats Itself
For more than 100 years, chart patterns have been recognized and categorized. The manner in which most of these patterns are repeated directs us to the conclusion that human psychology changes little as time passes.