Technical analysts claim that price fluctuations are not unpredictable: once a trend has been established, it usually will continue for a period.
Technical analysis is an attempt to predict the fluctuations of price, taking into consideration the previous changes on the Forex market. Price data reflects all market fundamentals and one can see regular, fairly predictable patterns, generated by price movements. Such patterns are also called signals. By examining past market signals, a technical analyst is trying to decipher a current market’s signals.
Technical analysis has been used in the stock market, and has a number of different forms and methods of use. One of such methods is the use of technical indicators, graphical representations of the price action. Other methods of technical analysis include trend lines, or support and resistance measurements. Most methods involve looking at the chart and reviewing recent history to see whether the price is following a certain pattern.
For example, if the price is moving in one direction, you can use trend lines to analyze where the price should go. In case the price goes back and forth in a range, support and resistance lines may be more appropriate to try and predict how the price would change direction.
Such mathematical representations of market data (studies) as price charts and volume charts are used by traders in order to find the ideal entry and exit points for a trade. It is important not only to identify a trend, but also to determine the strength and sustainability of that trend over time.
No trading method is perfect, and technical analysis is not an exception. Though there are some great technical tools and indicators you can use, there is also a certain aspect which can make the prediction somewhat more complicated. Every trader has their own interpretation of where they see trends and support, and this interpretation is usually referred to as their own trading system. However, it may happen that many traders will see the same price area as a buying point, for example, and the price will bounce as everyone makes similar moves. How lasting those moves will be, no one can say for sure.
Understanding technical analysis enables you to understand why certain price movements occurred and makes your trading plan more rational and disciplined.
There are three basic principle of technical analysis:
1.Market action discounts everything.
It is important to understand that price is affected by economic, political factors, market sentiment etc. Generally speaking, technical analysis uses the information which the price reflects in order to interpret what the market is holding for the future.
2.Prices move in trends.
The major purpose of the charts is to identify a trend at an early stage and then trade according to its direction. Significant patterns of market behavior may repeat themselves on a consistent basis, and recognizing this tendency is an important part of technical analysis.
3.History repeats itself.
The techniques which were effective in the past can be as effective to forecast future price movements. Recognized Forex chart patterns have been categorized for over 100 years and the repetitions in many patterns point at the fact that history tends to repeat itself and human psychology is quite predictable.
In all probability you have heard about fundamental analysis as a second school of thought in the financial markets. The main difference between technical and fundamental approaches is that technical analysis looks at the price movement of a security and uses this data to predict its future price movements, while fundamental analysis looks at economic factors, corporate growth trends, or fundamentals.
These two approaches complement each other. Knowing economic trends will help the technician in determining the potential significance of various technical signals and patterns. A balanced understanding of the two disciplines provides a much stronger sense of the market and a solid basis for a successful trading experience.