Technical Analysis is Based on 3 Factors Common in the Market:

1. Price Moves in Trends

Price movements follow trends. This means that after a trend has been established, future market movement is more likely to be in the same direction as the trend than to be against it. Most strategies are based on this concept - trend trading.

2. Price Discounts Everything

Forex analysis only considers price movement and assumes that, at any given time, a currency price reflects everything which has or could affect the currency including a country's economy and even the fundamental factors. This only leaves the study of price, which is a product of the supply and demand for a particular currency in the market.

3. History Tends to Repeat Itself

History repeats itself mainly in terms of price movement. Repetitive nature of market movements is attributed to investor psychology: in other words, forex participants tend to provide a consistent reaction to the market most of the time. Analysis uses patterns to analyze these price movements. Although these charts represent historical data they are still relevant because they illustrate chart patterns that often repeat themselves.

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Understanding this analysis of the market can be a valuable tool in determining the trend of any market & assisting with entry & exit levels for your trades.

The goal of these analysis methods is to help traders determine when the market is trending, and when it's not. If the forex currency pair is moving in one particular direction, then we want to be on board. If it is not, all you are going to do is lose money as you will get whipsawed around and this is not what we want as investors and traders.

Unfortunately, many people fight the trend and buying/selling in the opposite direction of a this direction, trying to pick a top or a bottom, only to see the market move further in direction of the trend.

Another common mistake traders often make is adding on to a losing trade position, averaging a loss. This is not a good strategy especially in a strongly trending trading market. It is something which experienced investors never do. The trend is your friend, never go against it.

This analysis studies alert investors of high probability setups and there are no certainties in financial market. Profits come from using proven strategies & methods to find a trending currency pair and taking trades in the same direction of the market trend.

With so many investors and traders using similar tools, analysis can become a self fulfilling prophecy. If many investors and traders use the same level as a buying point, the price goes up as everyone will make similar moves. However, the question is always how long these moves will last?

Understanding this analysis methods will give the charts some meaning when you look at them and help you understand why certain price movements occurred.

Charts are used with Indicators to look for chart patterns which have occurred in past under certain conditions. When these conditions are noted again, you can use the past chart patterns studies to make a buy or sell decision with increased probabilities of success because it has happened before.

Some of the most common indicators include:

• Moving Averages Indicator
• Relative Strength Index RSI Indicator
• Stochastic Oscillator
• Moving Average Convergence Divergence MACD Indicator
• FX Fibo Retracement Indicator
• Bollinger Bands Indicator

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Most indicators are shown separately from the chart usually below it. This is because these indicators often use a different scale than that of the price chart.

Some of the indicators are shown on the price chart itself, such as Moving Averages and Bollinger bands - these indicators are referred to as price overlays.

Explanation of these indicators is found under the tutorial: List of All Indicators - Technical Analysis PDF - Learn Technical Analysis PDF - Technical Analysis Examples

SUMMARY

1. Technical Analysis Relies on Defining Probabilities
2. Technical Analysis Uses History of Price Patterns
3. Technical Analysis Uses Several Analytical Tools (Indicators)
4. Technical Analysis Uses Chart Patterns
5. Technical Analysis Uses Many Chart Time frames

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Most traders prefer analysis over fundamental analysis, because Fundamental analysis is a more difficult strategy to implement as it is required for one to have a lot of knowledge and experience required to successfully analyze the enormous and fundamental data and economic reports. In addition forex fundamental analysis is not also very accurate since it involves looking at many factors all at once which might be interpreted differently by other investors and traders.

However, forex fundamental analysis that involves news trading is unpredictable and it's not so easy to interpret economic news reports.

Although analysis is also not so easy to master, you may find it not much simpler to master than fundamental analysis, learning the analysis methods used will also take you less time and will be easier to learn due to its nature which involves abiding by the analysis rules.

To learn how to trade currencies successfully, it is important that you understand the 3 analysis strategies, outlined below:

1. Forex currency pair moves will always follow a trend which can be identified by looking at the patterns or the candlesticks charts. If any investor tells you that you can also profit from the counter-trends consistently it will not be possible because the trend is the only proven method of making money in Forex.

2. The market forces will drive the currency up or down depending on supply and demand. Factors such as economic news releases might play a role in determining the demand supply of a currency. Forex analysis seeks to measure the demand supply of any currency using various analysis tools & indicators. The demand supply is reflected in the price action. Therefore, by simply looking at the price movements themselves you can try and predict what direction the price is likely to move towards using one or two indicators - analysis indicators like the moving average or support and resistance areas.

3. The market not only shows the history of the past prices, but will also follow the trend that was in place, until its direction reverses. Some very important indicators used to determine these market movements are Moving Averages, MACD and Bollinger Bands indicators.

When a currency starts to consolidate, which means there is no trend, you should use a different approach to analyze the trading market. You should use support and resistance levels and breakout strategies to analyze the ranging market - sideways moving market.

When the market retraces, you should use patterns & indicators to analyze whether the current trend will continue or reverse.