This archive report was first published on 17 December 2019.
The Basic Principles of Technical Analysis in Forex Trading ¶
Published on December 17, 2019
Technical analysis in Forex trading is a popular approach that involves interpreting charts and historical data to determine whether an asset's price will go up or down. This method was first laid out by Charles Dow, the founder of the Wall Street Journal and creator of the Dow Jones Industrial Index.
While technical analysis may seem complicated, its mission is to make trades easier to understand and reduce the guesswork behind the process. By grasping the basics of this method, traders can spot fluctuations in the market and even learn to manage risk.
What is Technical Analysis? ¶
Technical analysis involves interpreting charts and historical data to determine whether an asset's price will go up or down. Unlike fundamental analysis, which suggests that one needs to analyze the economic and political factors that tend to influence a security's strength or weakness, technical analysis is based on the idea that everything you need to know about an asset is already factored in the chart.
Three Principles of Technical Analysis ¶
- The market discounts everything: all you need to know about an asset price, including factors such as inflation, interest rate, and even force majeure events, is found in historical charts.
- Prices move in trends: the evolution of asset prices on the market is never random. All prices move according to trends, which can be bullish (rising), bearing (falling), or flat.
- History repeats itself: by looking far enough back at historical charts, analysts are able to understand that history tends to repeat itself.
Trading Indicators in Technical Analysis ¶
Every disciplined trader needs useful trading indicators to conduct technical analysis. These indicators can be classified into four types: trend indicators, momentum indicators, volume indicators, and volatility indicators.
- Trend indicators tell you if there is a specific trend on the market that you should pay attention to, and, most importantly, the direction in which the market is moving.
- Momentum indicators refer to the strength of the trend and also help you understand if that trend is likely to reverse.
- Volume indicators show how much an asset has been traded over a period of time and how strong the move is.
- Volatility indicators refer to how much an asset's price fluctuates over a certain period.
For each of these types, there are many examples of tools and indicators that traders can use to make informed decisions. Some popular trading indicators include Bollinger Bands, Fibonacci Tools, the Relative Strength Index (RSI), stochastic, and the Average Directional Index (ADX).
Many advocates of technical analysis recommend trading using multiple indicators. There's no such thing as a 100% accuracy rate here, which is why using multiple indicators can increase the chances of successfully forecasting market trends and taking action at the right moment.
