Forex Technical Analysis

Introduction to Forex Technical Analysis

Forex trading analysis is divided into two types: Fundamental analysis and Technical analysis.

While fundamental analysis attempts to predict movements in currencies by examining current political and economic events. Technical analysis uses historical economic data to predict movements in the foreign exchange.

Forex technical analysis is based on three assumptions: Price movements, currency prices and Price movements.

  • Price movements are a result of all market forces combined. Things that can affect currency prices include political events, economic conditions, supply and demand, seasonal variations and weather conditions. The technical analyst, however, is not concerned with the reasons for market movement, but rather, the movements themselves.

  • Currency prices follow trends. Many market patterns have been recognized as having predictable consequences.

  • Price movements follow historical trends. Forex data has been collected for over 100 years and patterns have emerged over time. These patterns are based on human psychology and the way people react to certain sets of circumstances.

You might ask is Forex Technical Analysis Necessary?

Most forex day traders rely heavily on technical analysis and may also use fundamental analysis to support their trading strategy. A major advantage of technical analysis over fundamental analysis is that it can be applied to many different markets and currencies at the same time. Fundamental analysis requires in-depth knowledge of the political and economic conditions of a particular country; therefore it is less likely that any one trader can do proper fundamental analysis on more than a few countries.

You may be put off by the seeming complexity of technical analysis and wonder if it is necessary for forex trading. As with any investment, forex trading requires a strategy. Although any strategy is possible, technical analysis is a proven method for predicting movements in the foreign exchange market. Does that mean it's a sure thing? Nothing is 100% certain, and currency prices are affected by a variety of forces.

This is why many traders use a combination of technical and fundamental analysis to plot their forex trading strategies. Your forex broker should provide access to a wide variety of charts for forex technical analysis. Some charting software is available free of charge while in-depth professional charts may carry a monthly fee. Charts can be viewed by various time scales and provide detailed information about price movements as well analytical overlays. Charts can be zoomed in to the tick level or zoomed out to see the broad picture over a period of months or years. Charts are updated in real time.

Before you start forex trading, it is a good idea to get forex trading training, become accustomed to market behaviour by following charts for a period of time and studying their movements and learning about trends. Many forex brokers provide practice accounts that can be used to place 'paper' bids – no real money is exchanged. These practice accounts will make you get some knowledge about forex charts and market movements while at the same time allowing you to become acquainted with the trading software a particular broker uses.