The Ultimate Guide of Technical Analysis in Forex Trading
Technical analysis in Forex is one of the most vital analyses used to predict the movement of currencies in the foreign exchange market. Both technical analysis and fundamental analysis are important in forecasting the behavior of the forex market. They have the same objective: to assist traders to forecast the movement of the market.
While some traders use both, most traders these days focus mainly on technical analysis for some very important reasons, which you will discover in this article.
What is Technical Analysis?
Technical analysis focuses on historical price patterns and trends in the forex market with the aim of predicting the possible direction of currency prices. Someone who uses technical analysis is called a technical analyst. Traders who use technical analysis are known as technical traders.
Technical analysis is NOT so much about prediction as it is about PROBABILITY.
Technical analysis is the study of historical price action in order to identify patterns and determine probabilities of the future direction of price. There are many ways to identify patterns in the financial markets, but most technical analysts focus on the following:
Chart patterns are the foundational building blocks of technical analysis. They repeat themselves in the market time and time again and are relatively easy to spot. These basic patterns appear on every timeframe and can, therefore, be used by scalpers, day traders, swing traders, position traders, and investors.
Candlestick patterns, which are technical trading tools, have been used for centuries to predict price direction. There are various candlestick patterns used to determine price direction and momentum, including three line strikes, two black gapping, three black crows, an evening star, and an abandoned baby.
Technical indicators are heuristic or mathematical calculations based on the price, volume, or open interest of a security or contract used by traders who follow technical analysis.
Technical analysis is based on the following three major assumptions:
#Market action is supreme: Technical analysts believe that very fundamental condition, such as state of the economy, social issues, and political factors, that could affect the behavior of the market is already illustrated in price movements.
Therefore, technical analysts are only concerned with the kind of movements the charts make, not the reasons behind the movements.
#The movement of currency prices follow trends: Followers of technical analysis in Forex believe that the constant fluctuation of currency prices in the forex market takes place in an orderly manner, which is both systematic and easy to predict.
There are three main trends in the currency market: upwards, downwards, or sideways. After a trend has been established, currency prices often tend to obey that pattern before forming another one.
#History always repeats itself: The movement of currency prices has been tracked for more than 100 years. And, over time, a number of repetitive patterns have been discovered. The manner in which these patterns are formed is an indication that human psychology does not experience much change over time.
Thus, technical analysts often study historical price movements because they believe that price will behave the same way it did before.
Advantages of Technical Analysis:
- Forex technical analysis only requires a few basic tools which are available on different platforms for free.
- Forex technical analysis can sometimes give high probability directional views and points of entry and exit from the market.
- There are a wide variety of technical analysis tools and indicators that can help with identifying possible trading setups.
Disadvantages of Technical Analysis:
- Because of its widespread use, technical analysis in Forex can trigger very abrupt market movements in the event that many traders come to the same conclusions.
- In some markets, technical analysis should always be combined with fundamental analysis.
Technical analysis in Forex is a profitable strategy to use in trading forex. The fault most newbie traders make is to complicate their trading. Technical analysis, when correctly mastered, can make the difference between a losing and a winning trader.
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- If you’re new to forex trading, download our Forex for Beginners Trading guide.
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