Technical Analysis

Technical analysis is one of the most common terms used throughout forex trading and it is where a trader looks at the price and volume data to be able to predict future movements. The basis of technical analysis was given by Charles H. Dow, whose methods were based off of the behavior of investors, on psychology and on the movement of prices.

Whenever you are doing an analysis based on the movement of prices, remember that you are then doing technical analysis. All the information a trader needs in order to do technical analysis can be found in the chart of the particular currency you are looking at. When doing technical analysis, you want to remember that any market, especially the forex, moves in trends.

The reason that this type of analysis is necessary in forex trading is because in the forex you can gain in a bull market and a bear market as you buy one currency and sell another. The trend lines that you use in technical analysis will be helpful in confirming the direction of the trend in a specific currency.

Advantages to Technical Analysis

The main advantage of technical analysis is the fact that all factors affecting the prices of currency, both rational and irrational, are expressed in a single element that represents the agreement between buyers and sellers. The element that we’re talking about here is the quotations. These synthesize the future expectations and estimates that investors have about each currency.

With technical analysis traders can detect when a trend is about to change or continue. They can also determine areas that can serve as starting points for an operation. One thing to remember though is that it is necessary to work with coldness and discipline, not being influenced by feelings, excitement or discouragement. This can cause traders to be swept away by the atmosphere in the market.

Creating a Technical Analysis

The first step to starting a technical analysis is to realize that your approach needs to be based on the tendency in the market. This can be primary, secondary or tertiary. With primary tendency it can last for years, secondary for months and tertiary tendencies are simply variations within a secondary tendency.

In a technical analysis, traders use indicators and patterns. Indicators are just mathematical operations on the range of prices that exist in a chart. Patterns, on the other hand, are forms that are often repeated over time. These charts and indicators (link) will be vital to doing a reliable technical analysis.

The second step in doing a technical analysis is on the resistance and support levels. Some of these levels remain constant over time and are very difficult to break upward (resistance) and can break downward (support) instead. Certain resistance or support levels are difficult to break because traders determine whether it is good to break or not.

Forex Technical Analysis When a rupture of a resistance or support level takes place, prices tend to go toward the following level of resistance or support. There can also be false breaks in a given level, which occur because traders are not attracted to breaking this particular level.

One of the most important things that a trader can do before creating a technical analysis is to understand the indicators and patterns that their forex broker will give to them. When trading forex online, brokers provide their traders with the essential tools and charts for doing technical analysis. If you are unable to read them, you will be in a lot of trouble when it comes time to trade.

The good news about this is there are many different ways to learn more about these charts and indicators. Many forex training programs have courses on reading and using these indicators and many of the best online forex brokers will also have educational materials for their traders on how to understand the indicators and patterns that you will be looking at.