Technical analysis is the process of studying price movement in order to identify patterns, find trends, support & resistance levels and generally learning to ‘read’ a market’s movements. What is technical analysis is achieved through learning about the use of charts, price movement, indicators and other analysis tools which we will look to cover.
One technical analysis theory is that although markets are chaotic (which any trader will know is true!), price action is not completely random. This gives the opportunity for a trader to look at historical price movements and determine the current trading conditions and potential price movement. As a result traders look for similar patterns that have formed in the past, and will form trade ideas believing that price will act the same way that it did before.
I will be the first person to tell you that technical analyses is more of an art than a science!
This ‘art’ will be developed as you gain experience which will improve your technical analysis skills. As a result of many hedge funds and large banks having advanced computer systems constantly analysing markets, it is rare to see any major inconsistency last longer than a matter of seconds. Therefore many traders turn to FOREX technical analysis because it presumes that all the factors that influence a price such as economic, political and psychological have already been priced into the exchange rate by the market.
In the world of FOREX, when a trader asks what is technical analysis, the first thing that comes to mind is a chart. Technical analysts use charts because they are the easiest way to visualize historical data. Looking at past data helps you spot trends and patterns which could help you find some great trading opportunities.
Patterns on charts tend to repeat themselves, which gives an edge to the trader who can spot them. Although algorithmic trading has increased in importance, most price movements are driven by humans, which tend to prefer the comfort of repetition rather than the risk of something new.
The data that price charts provide us gives us a picture of the price levels that the market participants have deemed important. By focusing your analysis on a market’s price chart you can streamline your trading to monitor how the market reacts to particular kinds of news and be able to take advantage of them.
With so many traders relying on working out what is technical analysis, price patterns have a tendency to become self-fulfilling. Equally you should be aware that just because several traders are looking at the same chart with the same patterns does not necessarily mean they will draw the same conclusions.
You should realise that technical analysis is subjective!
A key goal of working out what is technical analysis for any trader in the FOREX market is to determine whether a graph will trend in a certain direction, or if it will travel sideways and remain range-bound. The most common method to determine these characteristics is to draw trend lines that connect historical levels that have prevented a rate from heading higher or lower. These levels of support and resistance are used by technical traders to determine whether or not the given trend, or lack of trend, will continue. A trader therefore spends their time:
FOREX Prices typically move in an up and down fashion, in effect zig -zagging their way in whichever direction that particular price is going. These zig-zags will display two forms of patterns:
Although it is beyond the scope of this article, having an understanding of Fibonacci retracement, Bollinger bands and pivot points would be useful as these indicators are popular as they help to generate signals.
At the end of the day technical analysis of a market can help you determine not only when and where to enter a market, but much more importantly, when and where to get out.
Remember, there is no magical combination of technical indicators that will unlock some sort of secret trading strategy. The secret of successful trading is good risk management, discipline, and the ability to control your emotions. Anyone can guess right and win every once in a while, but to trade profitably consistently means knowing what is technical analysis. The basics covered here should arm you with the knowledge to take those first intrepid steps on your journey to becoming a successful technical analysis trader.