Technical analysis is the study of historical charts and price patterns to predict future price movements.
Traders who focus around this particular type of Forex analysis are referred to as ‘technical analysts’.
Technical analysts observe trends and other analytical charting tools known as technical indicators to gauge an understanding of future price movement. There are hundreds of various technical indicators available that can be analysed to gain a different aspect of what may happen to future price movement.
Key theories of technical analysis
Fundamental indicators are not taken into account
Technical analysis looks into how the price is being influenced by the market forces of supply and demand. It does not take into account any major changes to the market such as fundamental indicators (e.g news) that could significantly affect price movement.
Therefore, one of the big limitations of technical analysis is that it cannot accurately predict extreme events, for example; the United Kingdom voting for ‘Brexit’.
When there is a piece of extreme news, technical analysts are advised to ‘sit on the side lines’ and wait patiently for the market to settle back down to ‘normal’ market conditions before placing any trades.
Price movements are not totally random
Most technical analysis experts agree that prices trend with some pattern over time. If prices were always completely random then technical analysis would be unworkable. However, sometimes there are periods when the prices do not trend.
The key for every trader using technical analysis is to identify when a currency pair is trending and to execute appropriate trades during these trending periods.
There is a famous phrase technical analysts like to use;
TREND IS YOUR FRIEND
‘What’ is More Important than ‘Why’
There are two main questions that technical analysis is concerned about:
What is the current price of the currency pair?
What is the historical price of the currency pair?
Remember, technical analysis is based solely around the supply and demand of a currency to predict future price movement.
We will be learning more about technical indicators and trend-spotting in further lessons!
As the Forex market is highly liquid, technical analysts are more likely to be accurate and meaningful.
This is due to the huge number of market participants in the Forex market, meaning that the prices of currency pairs are a lot less likely to be manpulated by one or two investors.
- Technical analysis is the study of historical charts and price patterns to predict future price movements.
- Traders who focus around this particular type of Forex analysis are referred to as ‘technical analysts‘.
- Technical analysis looks into how the price is being influenced by the market forces of supply and demand.
- Most technical analysis experts agree that prices trend.