What is Technical Analysis in Forex – Explained
In this article
The most common question that pops up in a new trader head is, “what is technical analysis in forex“?
They want to learn more about this type of analysis but don’t know where to start.
Well, it’s your lucky day. As in this guide, we are going to dig deeper into technical analysis. So, if you are a beginner, this post can help you a lot.
How did it start?
Before beginning on technical analysis, it’s great to look back at the origins of technical analysis.
Financial market technical analysis has existed for as long as economies have been dominated by supply and demand.
The first historical records for Dutch merchants date from the 17th century, while Japanese rice traders date from the 18th century. Charles Dow, the founder of The Wall Street Journal, pushed technical research into the trading markets at the end of the nineteenth century.
Several notable scholars, including William P. Hamilton, Robert Rhea, Edson Gould, and John Magee, contributed to Dow Theory principles, assisting in the formation of its foundation.
Technical analysis has grown over time to include hundreds of patterns and signals produced through years of study.
What is technical analysis?
Technical analysis is the study of market patterns in a specific currency pair to detect trends and forecast potential price movements.
According to the theory, an individual may use historical market movements to forecast current trading conditions and future price movements.
A technical analyst is someone who uses technical analysis. Technical traders are traders who use technical research.
If price represents all available information, then price action is required to make a trade.
Technical analysis studies the price action’s movement and patterns.
Have you ever heard the saying, “History tends to repeat itself”?
That is the essence of technical research!
If a certain price has historically served as a strong support or resistance level, forex traders will keep an eye out for it and base their trades on that historical price level.
Technical analysts search for similar trends that have emerged in the past and shape trade ideas based on the belief that price would behave the same way it did previously.
How can you use technical analysis?
The technical analysis seeks to predict the price movement of almost any tradable asset that is subject to supply and demand factors.
Researchers have developed hundreds of trends and signals to facilitate technical analysis trading across the forex market. Technical analysts have also created a wide range of trading systems to assist them in forecasting and trading market changes.
Here’s how you can utilize technical analysis:
1. Chart Patterns
Technical analysts use drawing techniques like horizontal lines, trend lines, and Fibonacci levels to define well-known chart trends like reversal and continuation patterns. When established, these trends shed light on the strengths and weaknesses of both buyers and sellers in the respective market.
2. Candlestick Patterns
Traders in this study use price charts, such as candle charts, to show the open, close, high, and low price levels of a specific period. They use these charts to try to identify indications about buyer and seller behaviour in a short period.
3. Technical Indicators
You can use technical indicators to help you understand the market’s situation. Many indicators, for example, include indications when the market is overbought or oversold. Other indicators may provide traders with information on whether momentum is rising or falling.
Key concepts of technical analysis
Price action is everything
The main concept of technical analysis is based on Dow theory, which asserts that the current market price correctly represents all relevant details. As a result, any factor that affects supply or demand will ultimately be reflected in the chart.
Price follows a pattern
Technical research tends to favour the forex markets’ trend-like nature. Markets will move in uptrends. The bullish markets produce higher highs and lower lows regularly. A downtrend, or bearish market, is described by the opposite market behaviour of lower lows and lower highs.
A ranging market signifies a horizontal line and is not ideal for a trend-following trader. This is because there is almost no way to predict what will happen next during ranging times.
A ranging market means that the bulls and bears have roughly equal control. Neither side is powerful enough to overpower the other for a long enough period of time to establish a pattern. Markets appear to range the majority of the time, making identifying patterns important.
History tends to repeat itself
One of the key concepts of technical analysis is history tends to repeat itself. The repetitive nature of price fluctuations is often attributed to market psychology, which is highly predictable based on anxiety or excitement.
To grasp trends, technical analysis uses chart patterns to evaluate these emotions and related market movements. Although many types of technical analysis have been used for more than a century, they are still thought to be important because they show trends in price fluctuations that often repeat themselves.
- Technical indicators offer a wide range of options. Oscillators, volumes, trend indicators, and other styles, as well as their combinations, enables you to tailor the method to your specific needs.
- Using technical indicators can help filter out the emotional aspect in trade decisions, removing a large amount of psychological responsibility from your shoulders.
- The past price movements can’t accurately predict future events, as many factors influence the price.
- Some believe that the more indicators you use, the more accurate your market assessment would be. That is not true: indicators often contradict each other, and using several of them together can confuse even a pro.
Remember that there is no magical combination of technical analysis, which will reveal some kind of mysterious trading strategy.
Effective risk management, discipline, and the ability to control your emotions are the keys to effective trading. Anyone can make a correct guess and win once in a while, but it is almost impossible to stay profitable over time without risk management.
Pro tip: Technical analysis is more about probability than prediction.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst