Forex Trading Technical Analysis

Forex Market Analysis

Forex Trading analysis is very important to get an insight into the behavior of the market – two of the major methods in use are Fundamental Analysis and Technical Analysis. They are very different from one another – but both are necessary tools in the arsenal of a Forex trader. The goal of technical analysis is to predict movement in the market and also what the price of Forex will be, based on historical data. Tools used in fundamental analysis look at the causes of market movement, while technical tools look at the effects. A combination of these tools is used by traders to achieve superior trading results.

What Exactly is Technical Analysis?

Technical analysis is a method used to predict price movements as well as future trends in the market. This information is arrived by studying past market action. Technical analysis studies what had happened in the market – taking into account the price of instruments and trading volume to create charts from the available data and uses it as a primary tool to forecast. The biggest advantage of technical analysis is that one can follow market instruments on the one hand and different market instruments simultaneously.

Forex Trading Technical Principles

Three principles form the foundation for technical analysis;

  1. Market action: The actual price is an accurate reflection of all that is known to the market and how it affects it. For instance, supply and demand, market sentiment and political issues around the world. A purely technical analyst concerns himself with just price movements without looking at the underlying reasons.
  2. Trends in price movements: Technical analysis helps to identify patterns in how markets behave. Patterns do repeat themselves very consistency and these are used to calculate the probability of a particular outcome.
  3. History repeats itself: Human psychology has remained the same for a long time and Forex charts have recorded trends and have been categorized to reflect these patterns.

Forex Technical Analysis Broken into Categories:

As we have noted, Forex charts are based on market action based on volume and price. There are 5 categories of tools that are used for technical analysis.

  1. Indicators (oscillators, e.g.: Relative Strength Index)
  2. Number theory (Fibonacci numbers, Gann numbers)
  3. Waves (Elliott wave theory)
  4. Gaps (high-low, open-closing)
  5. Trends (tracking moving averages)

Technical analysis tools have been used in combination with economics and quantitative techniques to explain how markets work. This is a very subjective technique according to some analysts, but the tools still provide information of practical value. All in all people use data and their instincts to make decisions.