Here’s What you Need to Know to Get Started with Technical Analysis

September 05, 2018 14:39 UTC

Technical analysis is a field of market analysis adopted by thousands of investors internationally. Admired for its simple and effective approach to analysing the market, it is perceived by many as the only way to accurately predict future price movements during online forex trading.

Technical analysis involves reading market analysis charts and analysing technical indicators in an effort to accurately forecast and predict when the price of a currency will rise or fall and by how much. Unlike fundamental analysis, which involves analysing the latest forex news and macroeconomic factors to predict market movements, technical analysis whittles the analysis down to the specific figures presented on a graph. This type of analysis helps a trader to perceive when he or she should enter or exit a position.

Many people believe that technical analysis plays an important role in every investor's tool kit. It is built on price movements, essentially asserting that the market is never wrong and the price contains all the relevant information when deciding whether or not to buy a currency. In addition, the price is a perfect guide to the future, meaning that you can decide what to do next by analysing what's just happened.

More simply put, when matters more than why. Technical traders are rarely concerned about why something is happening; their answers are presented before them through the analysis of charts. This means that regardless of your particular view of a currency, all you need to do is spot what is happening in the market.

The Philosophy of Technical Forex Analysis

The three basic premises on which technical analysis is based are:

  • Market Activity Discounts Everything

The premise 'market activity discounts everything' means that any factor that can possibly affect price movements is actually reflected in the market price, meaning that the study of market price is the only thing required to predict the market when trading forex. The philosophy is to disregard the reasons why market movement is happening, instead focusing on what is happening and for how long.

  • Prices Move in Trends

Technical analysts believe that prices move in trends. The point of analyzing price actions on a chart is to identify trends early on and establish how that trend will pan out as time goes by. And since a trend tends to continue its journey instead of reversing, analysts believe that they can buy the product before the trend pattern gives us an alternative response.

  • History Repeats Itself

Technical analysis is largely based on the study of human psychology. Since chart patterns reflect certain standard trends that appear on price charts, it can be assumed that they will continue to do so in future. This concept requires the analyst to believe in the premise that the future is simply a repetition of the past. And although the markets will never duplicate themselves entirely, the recurrence of similar movements is enough to enable traders to recognise major market movements.

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How Does Technical Analysis Work?

When performing technical analysis you will gain a microeconomic view of a particular currency pair's movements. This involves comparing historical price graphs with present-day price graphs in order to establish patterns in the market.

A technical analyst will develop an FX trading strategy using the information they have acquired from their technical forex analysis. Some of the most common features analysed by traders include:

  • Support & Resistance
  • Trend and momentum
  • Price patterns such as candlestick patterns, chart patterns, time patterns, divergence patterns and wave patterns, amongst others.

Using Technical Indicators

Most traders rely on technical indicators when performing their analyses and there are plenty of indicators to select from, some more common and expedient than others.

It is not necessary to use hundreds of technical indicators to understand when is the best time to enter or exit the market. It is better to use a few high-quality technical indicators and your forex broker should offer a choice of indicators to choose from.

Some of the most common technical indicators include:

  1. MACD (Moving Average Convergence Divergence)
  2. Bollinger Bands
  3. Fibonacci
  4. EMA (Exponential Moving Average)
  5. ADX (Average Directional Index)
  6. RSI (Relative Strength Index)
  7. Stochastic Oscillator

There are countless technical indicators to choose from and this is just an example of some of the more common indicators available. Every indicator comes with its own advantages and disadvantages, giving investors unique opportunities to analyse the market in a manner that suits their individual style.

Advantages of Technical Analysis

Technical forex analysis possesses endless advantages that fundamental analysis simply does not enjoy. Some of the main benefits include:

  • Trend analysis

Trend Analysis tells you immediately whether a particular currency is in a downtrend, an uptrend or a sideways trend. Based on the trend there are certain factors that you will need to wait for (such as rebounds or pull backs) before you are ready to trade the trend.

  • Price never lies

The basic premise of forex technical analysis asserts that the movement of a currency's price reflects the commitment of market participants of either being bearish or bullish towards that currency. The commitment is clearly displayed within the charts, meaning that there is no need to resort to the analysis of complex forex news or wait for the release of economic reports to figure out where a currency is headed.

  • Trade signals

Your forex broker should provide you with trade signals that you can use when executing your trades. These signals also indicate where and when you should place a stop loss level, giving you the chance to evaluate each individual trade based on a Risk-Reward ratio, helping you to better establish whether the target amount is worth the risk.

  • Well established

Forex technical analysis is a well-established analytical activity that has been used in forex trading for many years. Since price movements occur in patterns and there are many reliable ways to establish these patterns, it has proven itself as a reliable way to analyse the market and predict price movements.

  • Access to a wealth of information

A wealth of resourceful information is available through charts and this information is accessible within moments. Charts have the ability to extract the most basic information, including support and resistance levels. They also provide detailed information on how momentum is building and the strength of a trend. Trends are easy to spot while support and resistance levels are easy to identify. Other factors appear very quickly on the charts.

  • Quick to perform

Thanks to innovations in technology it is now easier than ever to perform complex mathematical calculations. The internet is rife with various technical indicators that you can access free of charge, enabling you to place more accurate trades.

Many forex brokers offer a wealth of forex trading tools and technical indicators to traders as part of the trading package. For this reason forex technical analysis is very quick to perform, meaning that the trader spends more time placing trades and less time analysing irrelevant information.

Beginning your Career as a Technical Analyst

Many first-time traders argue that reading market analysis charts is too complicated and difficult; however live forex charts are far easier to analyse and interpret than the charts used for stock trading analysis. All you need is a little training and education to become more confident in analysing the charts. You will also need to learn how to effectively interpret your analyses.

Fortunately, there are endless resources available, including AM's vast educational centre complete with tutorials, live trading webinars, live educational webinars, technical analysis and much more.

When you feel confident that you are ready to begin currency trading you will simply need to register with an online forex broker. From here you can begin your market analysis and most online brokers provide in-depth charting software free of charge, which is usually provided through the forex trading platform and includes numerous technical indicators for comprehensive market analysis.

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