Forex strategy: technical analysis

One of the most important weapons in the currency markets is the technical analysis. It is used to study and determine market movements based on the data from the past. Technical analysis helps you predict the activity of the currency pairs. You can use past market information such as prices, trends and chart indicators to anticipate the movement of a particular amount of currency. The primary benefit of technical analysis is its universality. A trader, who deals with a couple of currencies and has expertise in one of them, is also capable of applying the same method to forecast the movement of another currency.

The field of technical analysis is based on three assumptions:

1) The market discounts everything.

This means that the actual price is the reflection of everything that is known to the market and that could affect it, for example, political factors, market sentiment as well as supply and demand. However, the pure technical analyst is only concerned with price movements, not with the reasons behind the particular alterations.

2) Price moves in trends.

Technical analysis is used to find out the typical movement or the patterns of market behavior that have long been known as important. For many given patterns there is a high chance that they will generate the expected outcomes. Also there are perceived patterns that repeat themselves on a consistent basis.

3) History repeats itself.

Forex chart patterns have been identified and classified for over 100 years and the way in which various patterns are repeated leads to the conclusion that human psychology changes little over time.

Forex charts depend on market action involving price. There are five categories in Forex technical analysis theory:

  • Trends (following moving average)
  • Indicators (oscillators, e.g.: Relative Strength Index (RSI)
  • Gaps (high-low, open-close)
  • Number theory (Fibonacci numbers, Gann numbers)
  • Waves (Elliott wave theory)

Forex investors consider technical analysis for exchange rate forecasting one of the key tools. As we know, technical analysis gives us a clear picture of price action in future by taking into account the historical market price analysis. One should have detailed information of forex technical analysis styles to get solid profits. With technical analysis on Forex, one should always keep in mind that theoretical principles combined with the thoughtful strategy is the key to fruitful results and positive trading. You should never use the styles you don't understand clearly. There is always a choice from a number of tactics offered, so you can pick and apply the one you are good at and invest intelligently for successful Forex trading.

Most experts believe that the following are the reasons why exchange rate predicting based on technical analysis has gradually taken a more excelling and vital role:

  • The forex market is essentially trend-following over a short term period.
  • A huge majority of deals are made by experimental market participants and that is why there are those having no investment behind them.
  • The forex market participants have to trade something whether or not there are any changes in macroeconomic basics.
  • Conventional forecasting methods are not that effective to figure out short-term market moves; therefore, some other analytical methods are needed to get good results.
  • The patterns made by supply and demand produce price patterns which can be used for technical analysis of exchange rates.
  • Technical analysis is used by investors alone or together with fundamental analysis.

There are different ways which can be used in forecasting but thing is that they all rely on price movements of the past. There is an increasing amount of investors and traders who trade using technical analysis signals only. In short, it can be stated that technical analysis in exchange rates forecasting works to the extent that it brings consistent good results for market players trying to guess short-term exchange rate changes. Therefore, it is the most popular forex rates forecasting method among forex traders.