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What is technical analysis?

What is technical analysis?

Technical analysis is a method of predicting changes in the price of a particular currency, which is based on the study of the market dynamics in the past. This method allows calculating the most favorable time for entering the market and concluding trade deals. Technical analysis is effective in both short and long term and does not require a large amount of time to follow the economic and political news and policy affecting the exchange rates. This causes enormous popularity of this method.

To predict the future price changes using technical analysis, it is sufficient to have basic analytical skills. Forecasting is done by studying charts of trading terminals, that can be represented in the form of various shapes: a rising wedge, a head and shoulders, a double bottom, a triangle, a rectangle, etc. Trade decisions depend on the type and stage of formation.

The principles of technical analysis

Technical analysis is based on three principles:

  1. The price includes everything.
  2. The movement of the market is a subject to trends.
  3. History repeats itself.

The first principle is based on the assertion that change is a result of the influence of all possible factors: political, economic, psychological, etc. Therefore, you can predict the behavior of exchange rates in the future according to the analysis of the past events.

The second postulate is the movement of the market as a subject to trends. It shows that all processes in the foreign exchange market are not chaotic, but depend on certain trends. There are three main trends:

  • uptrend (bullish) — prices grow;
  • downtrend (bearish) – prices fall;
  • lateral (flat) – prices move in the horizontal direction with insignificant oscillation up and down.

Most novice traders are guided by the principle “Never work against the trend.” It means you are going to risk while making trades contrary to the direction of the price movement. It is better to follow the trends. Only the experienced trader is able to recognize the price direction change and to make a bet on it, but the risk of losses is very high even in this case.

The last principle of technical analysis is "History repeats itself." Itmeans that the past actions led to certain results can bring the same outcomes. Therefore, you should take into account both your own and other’s experience when performing trading transactions in Forex.

How to conduct technical analysis in Forex

Technical analysis is used by both skilled traders and new ones, who know nothing about economic theory and the complexity of pricing. It can be used to predict trends in price of currency pairs and of securities. In technical analysis, it is necessary to master the basic tools (trends, shapes) and choose the most appropriate strategy.

The main task of technical analysis is to identify the patterns and forecast the future direction of the price movement. It is implemented with the help of graphs and charts emerging in the trading terminals, which reflect the dependence of the price of the individual factors. A trader must constantly monitor market dynamics in order to enter the market and make a transaction.

Nowadays, there are many companies providing predictions for the technical analysis in the Forex market. Those beginners who are afraid to make trading decisions independently can rely on the data analytical centers. It is much more effective than relying on luck or intuition.