Forex technical analysis is the process of assessing the market conditions and choosing whether to buy or sell a specific currency pair. Analysis in the forex market is commonly divided into two main categories; Technical and Fundamental analysis.
Technical Vs. Fundamental Analysis Explained
Technical analysis is based on 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 technical analysis depends mainly on charts and patterns, it also includes aspects of behavioral economics and risk management. The main goal behind technical analysis is identifying trading opportunities and predicting price direction.
Technical analysis is widely seen by novice traders as an easier approach to analyze the market. Learning the basics of forex technical analysis and tools can be sufficient to start trading. Once you understand the main concepts of technical analysis, you can apply them to any market, which makes it a flexible analytical tool.
Fundamental analysis, on the other hand, is evaluating the price of a currency and assessing the factors that could influence its value in the future, including external influences, as well as financial statements and economic trends.
While fundamental analysis analyzes the fundamental and economic factors, technical analysis tends to identify price trends, which conveniently can be caused by the underlying fundamentals.
Short-term traders usually focus on technical analysis, while medium and long-term traders favor fundamental analysis as it provides a bigger picture of where the price is heading in the future.
Core Concepts of Technical Analysis
- History repeats itself:
It is basically believed that human emotions are the main driver of prices in the financial markets. Therefore, historic price action is likely to be repeated once traders experience the same emotions.
- Prices move in trends:
This concept reflects the fact that prices do not move randomly, as they follow specific trends. The objective of technical analysis is to identify these trends and predict future trends.
- Price action is everything:
This is based on the assumption that price charts reflect what you need to know about prices. To analyze the market, all you have to do is analyze the price movement.
Why Do Traders Use Technical Analysis?
Technical price analysis is essential for identifying the overall price trend, entry and exit points for every trade, and support and resistance levels. Technical analysis helps you to determine not only when to enter a market, but more importantly when to get out.
Technical Tools
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. They vary from simplicity as in trendlines to complicated mathematical calculations. However, advanced trading platforms do all the calculating work for you. The most popular technical tools are:
Trendlines and Price Channels:
The Trend line is a charting technique that uses lines to simplify the direction of a currency. While a channel consists of two trend lines parallel to each other. The channel can be used to interpret the levels of support and resistance. Trend lines help to identify entry and exit points through support and resistance levels. Read more on Trend Analysis in Forex Trading.
Moving Average:
The moving average indicator is a trend-following technical indicator that is commonly used to identify support and resistance levels as well as the overall trend. They use a data calculation to analyze the average change in a data series over time.
Chart Patterns:
A forex chart is a price graph that shows the historical price data for currency pairs. It graphically depicts the historical price behavior of a currency pair across different time frames, along with technical indicators and price patterns. A forex chart shows the sequence of prices over a certain time frame. By looking at a chart, you can find a group of data plotted in a general direction, which reflects the overall direction of the currency pair. The prices and dates will vary depending on the time frame you choose. Discover the different types of forex charts and how to read them.
Forex Technical Analysis Steps
- Study the chart, evaluate the momentum and identify the overall price trend.
- Search for price patterns.
- Point out resistance and support levels.
- Apply the technical indicators.
- Decide your trade (Long/short) and choose the lot size.
How to learn Forex Technical Analysis?
There are plenty of online resources to learn the basics of forex technical analysis. However, attending online courses and getting in touch with professional traders can help speed up the process. This will help you avoid common mistakes usually made by beginners. Read the detailed guide on how to Learn Forex Trading.
The best way to learn technical analysis is to understand the key principles and applying that knowledge to demo trading.
Another method to learn is imitating professional traders until you get sufficient to trade on your own. Copy trading is a strategy through which a trader can copy a professional trader’s positions, either automatically or manually. This trading technique aims to follow professional traders who have a track record you would like to emulate. It is a way to automate your trading strategy. Copy-trading allows traders to monitor and learn from the strategies of successful traders. This technique best suits traders who don’t have time to keep up with the market or still lack the experience to trade profitably on their own. Learn more on how to Copy Trade with AximTrade.
Start Forex Trading with AximTrade
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