What is Technical Analysis? - What Does Technical Analysis Mean?
Technical analysis is the study of forex price charts so as to learn how to predict forex price movements in the currency market.
Technical analysis uses historical price chart data to predict the next likely movement of the forex price trend.
Forex technical analysis also include the use of various forex price patterns that can be identified on forex charts by traders. These price patterns are identified as commonly repeating patterns that can be used by traders to predict next likely market movement based on technical analysis of these commonly repeating chart price patterns.
Forex traders then come up with various forex trading strategies that incorporate these technical analysis techniques in their forex trading plan and then use these strategies to generate forex trading signals & detect when to buy a forex currency, when to open a sell forex trade & also when to close a forex trade position.
Technical Analysis is Based on Three Factors Common in the Forex Market:
1. Price Moves in Trends
Price movements follow forex trends. This means that after a forex trend has been established, future market price movement is more likely to be in same direction as the Forex trend than to be against it. Most forex trade strategies are based on this technical analysis concept.
2. Price Discounts Everything
Technical analysis only considers forex price movement and assumes that, at any given time, a currency price reflects everything that has or could affect the currency price including a country's economy and even the fundamental factors. This only leaves the study of forex price, which is a product of the supply and demand for a particular currency in the forex trading market.
3. History Tends to Repeat Itself
History repeats itself mainly in terms of forex price movement. Repetitive nature of forex market movements is attributed to forex trader psychology; in other words, forex participants tend to provide a consistent reaction to the forex market most of the time. Technical analysis uses forex chart patterns to analyze these chart price movements. Although these forex charts represent historical data they are still relevant because they illustrate price patterns that often repeat themselves.
Understanding this forex technical analysis in Forex trading can be a valuable tool in determining the forex trend of any market & assisting with entry & exit levels for your forex trades.
The goal of these technical analysis techniques is to help forex traders determine when a market is trending, and when it is 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.
Unfortunately, many traders fight the trend and buying/selling in the opposite direction of a this market trend direction, trying to pick a top or a bottom, only to see the market move further in direction of the trend.
Another common mistake forex traders often make is adding on to a losing position, averaging a loss. This is not a good forex trading strategy especially in a strongly trending FX trading market. It is something that experienced FX trader never do. The trend is your friend, never go against it.
Forex technical analysis studies alert forex traders of high probability setups and there are no certainties in financial market. Profits come from using proven forex strategies & methods to find a trending currency pair and taking trades in same direction as that of the forex trend.
