Technical Analysis in Forex Trading
Technical analysis is a form of market analysis used for forecasting the future price direction based on the past price history of the market.
The 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:
- The market discounts everything - the market price already reflects all information.
- History tends to repeat itself.
- Price moves in trends.
Technical analysis 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 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.
For making technical analysis in Forex market, traders should understand and use such terms as trend, channel, support and resistance levels. Using the information obtained from the charts, it is possible to identify the best moments for the position entry and exit, recognize and predict when there will be trend fracture or its continuation in time.
Most of what we nowadays know as a technical analysis theory has originated from ideas proposed by Charles Dow and his partner Edward Jones (Dow Jones & Company since 1882) back in the end of 19 century. Those ideas were published in the Wall Street Journal and are now assimilated by the majority of technicians even though most of them are not aware of the source.
Trading chart patterns are one of the technical analysis methods, intended to define market turns and trends. With the help of a chart pattern it becomes easier to notice conditions where the market tends to break out. Due to those graphical formations it becomes possible to see whether the price is likely to continue its direction or go reverse.
Technical indicators are inseparable part of technical analysis. They aim to predict future market movements and help a trader to be oriented in the market. There is a very large range of indicators which are used by the traders for forecasting the market. Some people prefer an indicator which is proved to work in the past; others try to experience new ones to reach success. Examples of such technical indicators are trading indicators by Bill Williams, Oscillators, Trend and Volume indicators.