Forex Technical Analysis

The aim of forex technical analysis is to predict future movements of price with the help of past market data.

Most forex traders will resort to technical analysis when they want a total picture of the price history of one of their investments, and even a new trader will quickly look at a chart to figure out if they are buying at a reasonable price or entering a tricky market.

There are some key assumptions made by forex technical analysis experts. Technical analysts believe that market fundamentals are all reflected in the price data, and there is no need to study any differing opinions, moods or other market fundamentals.

They believe that history is repeated in fairly predictable, regular patterns. Price movements generate these patterns, which are known as signals. The goal of forex technical analysis is to examine the signals of a past market to discover the current market’s signals.

Forex technical analysts also believe that there is a trend in the movement of prices, and price fluctuations are not unpredictable or random. Once a price trend has become established whether it is down, up or sideways, it will continue to be so for sometime.

Forex traders depend on volume charts, price charts and various other representations of the market data (known as studies), to figure out the best entry & exit points for their trade. Some of these studies can help the trader identify a trend, some help in establishing the sustainability and strength of a trend over a period of time.

Forex technical analysis is useful as it can bring discipline to your trading plan and minimize the emotions. Sometimes it may be difficult to set aside basic impressions and follow the entry and exit points as preplanned. But technical analysis, while it may not be perfect, can help you in viewing your trading plan dispassionately and with more objectivity.

Forex technical analysis uses different types of price charts like bar charts, point & figure charts and candlestick charts which are linked to market action.

Forex technical analysis theory also uses Indicators such as Trend, Strength, Volatality etc.

Trend indicators smoothens out price data to show a persistent sideways, up or down trend, for example, moving averages or trend lines.

Strength indicators show intensity of the market’s opinion on a particular price by analyzing what market positions have been taken by different market participants. Open interest or volume are ingredients of the strength indicators.

Volatility displays the magnitude of daily price fluctuations in any directional trend. Change in volatility anticipates change in prices.

Cycle indicators show market patterns getting repeated due to recurrent events like elections or seasons. The Cycle indicators affect the timing of market patterns.

The price levels at which the markets repeatedly fall or rise and reverse are described by Support and Resistance indicators, and the weakness or strength of trends as they continue over time are determined by Momentum indicators. Momentum is the highest at the start of a trend and lowest when trends change.