Technical analysis is a popular forex trading approach that helps traders predict trends in the market. Generally, forex analysis is focused on the study of price movements in the forex market. Traders analyze prices based on historic chart patterns and technical indicators to predict future trends in the market. It is the process of mixing the past and present performance of a market that the trader uses in the form of price action, indicators, and patterns to predict future trends before entering a trade.
What is Technical Analysis?
Technical analysis is the study of historical price action in order to identify price patterns and predict the future movements in the forex market through the use of technical indicators and historic price patterns. Although forex analysis is based on the study of charts and patterns, it can also include aspects of behavioral economics and risk management. The main goal behind technical analysis is identifying trading opportunities and predicting price direction.
Markets can move in three directions: up, down, or sideways.
What are the advantages of Technical Analysis?
Technical analysis can be easily learned by beginner traders as it is more understandable and easier to use if you get the basics. Forex technical analysis only requires a few basic tools that are available on trading platforms. It can be smoothly applied to get a directional overview for price action and points of entry and exit from the market. When it comes to technical tools and indicators, there are a wide variety of technical analysis tools and indicators that can help you identify good trading opportunities.
Technical analysis helps you to determine not only when to enter a market, but more importantly when to get out.
To learn forex technical analysis, you need to gain a solid understanding of the core principles and then apply that knowledge through backtesting. Today, many brokers offer trading platforms that offer simulated trading which resembles live markets. Open a demo forex account and start applying your knowledge.
Once you understand the main concepts of technical analysis, you can apply them to any market, which makes it a flexible analytical tool. While fundamental analysis analyzes the fundamental factors, technical analysis tends to identify price trends, which conveniently can be caused by the underlying fundamentals.
Understanding the difference between Technical Analysis and Fundmental Analysis
In the world of financial markets, analysis plays a main role in providing market traders and investors with insights and predictions. Fundamental analysis is another approach commonly used by investors to study the market. Essentially, the fundamental analysis is a more extensive overlook of the market, unlike technical analysis which is based on following the trend and price movements. Eventually, traders who are using fundamental analysis in the forex market will ignore chart trends in favor of checking the market news releases and predict the market movement.
Initially, there is no ultimate approach in analyzing the market and there are successful traders who use a combination of technical and fundamental analysis. Commonly, technical analysis is always famous for day trading and short-term positions, whereas fundamental analysis is mostly for traders who like to hold their positions for a longer period.
Technical Analysis Indicators
Technical analysts or traders depend on some technical indicators when looking for opportunities in the market. Traders often make use of volume and priced-based indicators that assist in detecting support and resistance levels, how often they are maintained or breached as well ascertaining the length of a trend. Technical analysis and indicators can be applied to multiple time frame analyses, from 1 minute to monthly charts which gives the trader a different perspective of the price action.
Popular technical analysis indicators are:
- Moving Averages: a calculation to analyze data using the average change in a data series over time. For majority of forex traders, Moving Averages are considered as the most commonly-used technical indicator. By searching in the most popluar trading strategies you will discover that they are relying on moving averages.
- Relative strength index (RSI): a momentum indicator used to identify current and historical strength or weakness based on the closing prices of a recent trading period.
- Moving average convergence divergence (MACD): a trend indicator designed to detect changes in the strength, direction, momentum, and duration of a price trend.
How to use Technical Analysis
Technical analysis is based on the theory that the markets are chaotic, as no one knows for sure what will happen next. However, the price action is not completely random and it can be predicted if use suitable analytical tools. Most traders admit that there are no certainties in predicting the next price movements. That’s why successful trading is not about being right or wrong, it’s rather about determining probabilities and trading when the market matches your view. Determining probabilities involves forecasting market direction and when or where to enter a trade, but more important is determining your risk-to-reward ratio.
Remember that there is no combination of technical indicators that would reveal some secrets of a magical trading strategy. The secret of successful trading is good risk management, and the ability to control your emotions. Without proper risk management, it is impossible for your trading to remain profitable over time.
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