Technical analysis tests to forecast future price movements by analyzing past market data.
One of the basic principles is that historical price data predicts future price action.
Whereas the forex is a 24-hour market, there tend to be a significant amount of data that can be used to determine possible future price activity. This makes it an ideal market for traders that use technical tools, such as trends, charts and indicators.
There are three basic steps forming this basis:
1. Market action discounts everything! This means that the price is a reflection of all components that is known to affect the market. Some of the factors are: fundamentals, supply and demand, political pressure factors and market sentiment. Pure technical analysis is only concerned with up and down price movements, not with the reasons for those changes.
2. Prices move in trends. Technical analysis is used to calculate patterns of market behavior. That market behavior has been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. You should also be aware that there are patterns that repeat on a predictable basis.
3. History repeats itself. Forex Trading chart patterns have been recognized and categorized for over 100 years, and these leads to the conclusion that human psychology changes little over time. Since patterns have worked well in the past, it is assumed that they will not change in the future.
Technical analysis goal is to forecast price trends in future based on historical data along with the volume. Any private investor can access the technical analysis tools in order to compute his or her trading decisions. Technical analysis has been in use for centuries, that's why its awards are based on the experience, prolonged observation and can be considered quite reliable.
Japan traders have been using candlestick techniques since in the 18th century, so, it is thought as the oldest one
Even fundamental traders will glance at a chart to see if they're buying at a fair price, selling at a historical top or entering a sideways market.
RSI (Relative Strength Index) – The RSI is a price-tracking oscillator that ranges between 0 and 100.
Chart patterns – Trend, Support, Resistance, Flag, Pennant, Wedge, Gap, Head and shoulders, Rectangle, Ascending triangle, descending triangle, Symmetrical triangle, Breakout, Double top, Triple top, Price channel, Rounding bottom, Rounding top.
Fibonacci – Interpretation of the Fibonacci numbers in technical analysis forecasts changes in trends as prices approach lines created by Fibonacci studies. When used in technical analysis, the golden ratio is typically translated into three percentages: 38.2%, 50% and 61.8%.
Technical analysis is valuable because every possible bit of information is included in the price of a security, it is not necessary to analyze the fundamental, economic, political, etc. factors that might influence that price. Because all available information is already included in the current price, just a study of the price movement is required.
This is just a very basic introduction to Forex Technical Analysis. You should do much more reading before investing your hard earned money.
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