What is Technical Analysis?
Technical analysis refers to the means of evaluating and predicting forex market movements using historical price data and market statistics. It is based on a couple of assumptions that will be discussed shortly. But basically, it involves the identification of price patterns. And using it to predict market movement based on precedence.
Forex technical analysis is one of the major types of analysis used in forex trading. The second being fundamental analysis. A person who trades using technical analysis trades with the chart and the chart alone.
Basis of Technical Analysis
Technical analysis in forex trading was first proposed by Charles Dow. It is based on three major assumptions. First, the completeness/ wholeness of the chart. Secondly, price moves in trends. And thirdly, history tends to repeat itself.
Completeness/Wholeness of the Chart: This assumes that the price chart is formed from all the data related to the pairs in question. This means that the chart is a culmination of all the happenings, fundamental or otherwise. Thus, whatever data is related to the price is expressed in the chart. Therefore, no other source of information is needed.
Price Moves in Trends: The second assumption of technical analysis is that price moves in trends. This means that whenever the price is going up, it will continue to go up in a series of higher highs and higher lows – an uptrend. Once it peaks it reverses into a downtrend. A series of lower lows and lower highs. There is usually an intermission between the opposite trends before the price reverses.
History tends to repeat itself: This is about the most important assumption. It assumes that the market moves in cycles preceded by the formation of certain patterns. The repetition of a pattern would mean a repetition of the movement after that particular pattern in the past.
It is based on three assumptions that technical analysts base their predictions on as they have been found to be true.
Tools For Technical Analysis
The analysis of the price chart is carried out using different tools. These tools are used to identify chart patterns.
Examples of these tools which are also known as indicators are: trend indicators, volume and momentum indicators, and oscillators.
Learn more about forex indicators.
Technical Analysis can also be carried out without the use of programmed indicators. This involves the physical identification of chart patterns, and support and resistance levels.
Advantages
The major advantage of technical analysis lies in the fact that with it you can make precise entry and exit decisions. This is unlike fundamental analysis that gives a specific point of entry or exit.
Another advantage of technical analysis is that it can be self-fulfilling. If a critical mass of traders uses the same rules, then they would at the same time take the same position. This would lead to the actualization of their prediction.
Disadvantages
The disadvantage of technical analysis is that no matter the semblance of current happenings to past ones, it may still fail. This is because the market is what it is. No form of analysis is 100% accurate.
Another disadvantage is that most programmed technical analysis indicators are lagged. This means that they may signal you only after the move has begun and not tell you to exit as it has long ended. This inaccuracy can lead to losses.
In conclusion, technical analysis is a form of forex analysis that has been found to work. While it may not be 100% accurate because no one knows the future, it is capable of making trading profitable. This is if combined with proper risk management principles.
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