Forex technical analysis is at the heart of successful and effective trading. It is one of the key factors of any trading strategy. If a trader has covered technical analysis of Forex market and is able to correctly apply it, then one can be confident in profitability of deals.
What Is Forex Technical Analysis?
Technical analysis is investigation into market dynamics through the study of the history of currency rates. Typically, this is carried out using charts of currency rates. The main purpose of technical analysis is predicting the behavior of prices in the future. This kind of prediction is the first step towards understanding how to trade successfully on Forex markets. This direction of market study is based on the following three assumptions:
- Price incorporates all factors
- Price movement depends on trends
- History repeats itself
Technical analyst assumes that the causes that in any way affect the currency quotes are reflected in the dynamics of this quotation. Technical analysts do not investigate into the underlying causes, that stand for increase or decrease in the price of a currency, and in some cases, for example at the beginning of the formation of any trends or turning points, these causes may be unknown. Using a variety of tools, technical analysts examine the price itself and based on that make corresponding conclusions. In fact, technical analysts seek to ensure that the market itself shows them the most likely direction of its development.
Forex Technical Analysis: Trend
In this connection it is necessary to introduce the concept of trend. Trend is at the core of technical analysis. Everything that happens in the market is subject to certain trends. The main goal to study the dynamics of currency rates is to identify market trends at an early stage and trade in accordance with this direction. Most of the strategies based on technical analysis are trend-following, i.e. their function is to help the analyst to recognize the tendency and follow it for the whole period of its presence. It is also important to recognize that study and understanding of the market is impossible without understanding human psychology.
It is well known that human nature is rather constant and does not change for a long time, therefore, price dynamics in the past were very much alike the ones of the present and even future. Thus, graphic price models that have been highlighted and classified over hundred years ago are present on any market today. The fact that these models were working in past, firms a ground to predict that in the future they will work as well, because they are based on human psychology, which is not changing over years.
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