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Technical analysis is the study and analysis of market price movement in order to forecast future market price movement and does not concern itself with a currency's basics or fundamentals. Rather, technical analysis involves the study of a currency trading patterns through the use of charts, trend lines, support and resistance levels, and many other mathematical analysis tools to help identify trading opportunities.
The most basic concept of technical analysis is that markets have a tendency to trend. Being able to identify trends in their earliest stage of development is the key to technical analysis. When to buy and when to sell a currency pair could very well be found in technical analysis.
TA has become very popular over the past several years, as more and more people believe that the historical performance of a currency is a strong indication of future performance. The primary tools of the technical currency trader are charts. Forex charts are used to identify trends and patterns and to build mechanical trading systems in order to find "profitable"trading opportunities.
Why does technical analysis work?
Technical analysis works because traders use it the same way, if for example a currency pair moves below it's 200 day key moving average, many FX traders will sell that currency pair because they strongly believe it's price will decline further.
Why do Chart Patterns, Pivot Points, Support & Resistance, Candlestick Patterns and other TA indicators work? Same reason, they work because many traders use them in the SAME WAY.
The Key is Psychology: "you trade people, not currencies."
Primary tools used in forex technical analysis
A chart is a visualized representation of the price movements between buyers and sellers in the currency market and is a trader's primary tool to analyze the market.
The primary tools of the technical currency trader are charts
What's plotted on forex charts?
1) Technical Indicators
A technical indicator is a mathematical calculation using price( and volume) history and is primary used to build trading systems. A forex trading system is defined by a common set of rules developed around technical indicators that signal entry and exit points for a given currency pair.
Basically, technical indicators used in forex technical analysis can be arranged in four main categories:
- Oscillators (indicate overbought / oversold market conditions)
- Trend (spot a NEW trend)
- Trend - Confirming (CONFIRM the new trend)
- Volume ( determine market interest)
2) Chart Patterns
Chart pattern analysis is the study of patterns that are naturally formed within the currency chart and can be extremely helpful in making profitable trading decision. Very popular patterns among currency traders include head & shoulders, rectangles, double top/bottom and candlestick chart patterns.
Hammer and Hanging Man candlestick pattern |
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