Forex traders use different methods to predict price changes and future trends. One of these methods is called technical analysis. It is so named because the technical analyst uses charted data of past market action to predict how and when trends will develop. The data includes past prices and the volume of trading. This historical information becomes the analyst’s guide for future trading decisions.
Technical analysis is built on three principles:
1. Market action discounts everything - This means that the currency’s selling price is determined by factors that are known to the market like supply and demand, political issues and the attitudes of market participants. The technical analyst is only concerned with the actual price movements, not with the reasons for the changes.
2. Prices move in trends - There are certain recurring trend patterns that analysts have identified as being significant. Many of these patterns can be counted upon to produce expected results. Technical analysis identifys when these trend patterns will occur.
3. History repeats itself - Forex chart patterns have been followed for over 100 years. The manner in which many patterns have repeated themselves leads technical analysts to believe that these patterns will continue to recur in the same way.
Because Forex charts are based on market action involving price, a number of different factors affecting price need to be examined. These factors make up the five categories of the Forex technical analysis methodology.
The technical analyst is not concerned with any of the underlying factors that affect the market the way the fundamental analyst is. In the technical analyst’s world those events have already taken place; the issue then becomes looking at the factual data to predict future activity. Technical analysis is most successfully used to analyze shorter-term price movements and to set profit objectives.
Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
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