Technical Analysis in the Forex Market

Technical analysis is the method of forecasting price movements in the forex market by looking at purely market-generated data. Almost every trader uses some kind of technical analysis.

Price charts are one such basic method of analysis. These charts help traders in determining the ideal entry and exit points for a trade by providing a visual representation of the historical price action. Just by looking at a chart, the traders come to know if they are buying at a fair price or selling at a cyclical top.

An ideal technical analysis also incorporates the fundamental considerations by incorporating them in the charts and data tables. Technical analysis assumes that all market fundamentals are represented in the actual market data.

Technical Analysis - An Armory of Forex Trading Tools

There are three basic principles behind all technical analysis. These are the actions of the market in relation to current events, trends in price movements and past Forex history.

Technical analysis systems largely depend on mathematical representations of the Forex market patterns and behaviors. These include price charts, volume charts, and a long list of other more specific methods of analysis.

Market data are used to determine the strength and sustainability of a particular trend. Technical analysis is therefore one method that helps you forming a disciplined trading method.

Few of the basic Price charts include various chart patterns that show price action. The most common are bar charts where each bar represents one period of time which can be anything from one minute to one month or even several years.

Forex Charting Techniques for Detailed Analysis

Candlestick patterns can also be used to forecast the market. With colored bodies, candlesticks provide greater visual detail in their chart patterns than bar charts. Point and figure patterns are essentially the same as bar charts but Xs and Os are used to market changes in price direction.

• Technical indicators like Trend, Strength, Volatility, Cycle, Support or Resistance, Momentum indicators are again quite helpful segment of technical analysis. Trend describes the persistence of price movement in one direction over time. Trends can move in three directions -- up, down and sideways.
  

• Market strength is the intensity of market opinion with reference to a price by examining the market positions taken by various market participants. They are based on volume or open interest.
  

• Volatility is the magnitude, or size, of day-to-day price fluctuations independent of their direction. It has been observed that changes in volatility tend to lead changes in prices.

• Cycle indicates repeating patterns of market movement, specific to recurrent events, such as seasons, elections, or yearly budget. Cycle indicators determine the timing of a particular market patterns. Elliott Waves are one of the most well known examples of Cyclic indicators.

• Support and resistance describes the price levels in which the markets repeatedly rise or fall and then reverse.

• Momentum is the speed at which prices move over a given time period. The momentum indicators determine the strength or weakness of a trend. Momentum is highest at the beginning of a trend and lowest at trend turning points. If momentum is trending strongly and prices are flat, it forecasts a potential change in price direction.

Effective Implementation of Technical Analysis = Profitable Forex Trading

To use Forex technical analysis effectively, you must have a good understanding of the basic tenets of technical analysis. You must remember that price is your primary tool. But almost all the systems incorporate serious technical studies to delve deeper into the data.

Some such time tested studies are Moving Averages, Stochastic, RSI (Relative Strength Index), Bollinger Bands, MACD (Moving Average Convergence Divergence), Fibonacci Retracements etc. But you should not get engrossed in the mathematics involved in putting together each study.

It is much more important to understand how and why these studies can be manipulated in an ideal way for the currency you are trading. Reading between the lines and finding the details behind the details are therefore going to be your key to success.