Technical Analysis in Forex Trading

KEY TAKEAWAYS

• Technical analysis of a market can help you determine when and where to enter and exit the market.
• Technical analysts believe past price changes of a security can be valuable indicators of the security's future price movements.
• Technical analysis does not like when other forces can influence the price of a security.

What is Forex Technical Analysis

Forex technical analysis is a form of Forex market analysis used for forecasting the future price direction based on the past price history of the market.

The FX Technical Analysis studies are mainly based on price and volume data. By displaying the historical market activity this form of Analysis helps to make inferences about the future market performance.

The three primary ideas of the Technical Analysis are:

1. The Market Discounts Everything - the market price already reflects all information.
2. History Tends to Repeat itself.
3. Price Moves in Trends.

Technical Analysis in Forex reveals the regularly repeating market situations by two commonly used methods: Chart Analysis (also called Charting) and Statistical Approach. In Chart Analysis, technical analysts focus on identifying price patterns that occur repeatedly and finding market trends. In case of Statistical Approach they use different types of Forex Technical Indicators to predict the likely future trend.

This forecasting method increases the investors’ awareness of the market risk. Understanding the approaches of this analysis gives traders a set of skills that enables them to make better investment decisions.

Technical analysis is a broad area of study and in this section you can find a detailed coverage of its diverse concepts and tools that modern professional investors employ to predict the market movements.

Understanding Technical Analysis

Traders use technical analysis in Forex trading because they believe that exchange rates aren't always determined by economic fundamentals - central bank activity, prices and interest rates. Though long-term trends in the Forex markets are likely caused by these fundamental events, it seems that Forex traders are driven to use technical analysis because of the volatility and leverage offered by the various Forex markets.

Forex is particularly well suited to using technical analysis. As you know technical analysis is a set of techniques used to attempt to predict future price movements of financial products based on historical movements and price patterns.

Technical analysis boils down to two things:

• Identifying the trend
• And identifying support and resistance lines, through the use of price charts or time tables.

Technical analysis is based on the theory that markets are chaotic and no one knows exactly what will happen next, but at the same time, price movements are not completely random. The mathematical theory of chaos proves that in a state of chaos there are certain patterns that tend to repeat themselves.

Technical analysis of a market can help you determine when and where to enter and exit the market.

It is important to understand trendlines and know how to draw them, since they are instrumental in spotting areas of support and resistance on a price chart. Trendlines are straight lines drawn on a chart by connecting a series of descending peaks (highs) or ascending troughs (lows).

Let’s review Forex chart patterns and understand how they are used in technical analysis. In general, technical analysts consider the following broad types of indicators:

• Price trends
• Chart patterns
  • Continuation Patterns
  • Pennants
  • Flags
  • Wedges
  • Triangles
  • Cup and Handles
  • Head and Shoulders
  • Double Top Gaps
• Volume and momentum indicators
• Oscillators
• Moving averages
• Support and resistance levels

Bottom line on Technical Analysis

Technical analysis focuses on answering these questions; What is the price, what is the price history and where is it going.

Technical analysis is the forecasting of future price movements based on the study of past price movements. Just like weather forecasting, technical analysis does not provide absolute forecasts for the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time.

Note: technical analysis does not like when other forces can influence the price of a security.

Also, important to remember that technical analysis is a subject to interpretation, it's not exact science.