Technical Analysis – The Basics

It is very important to know the methods used to analyze securities before we get into the world of trades. One of the important methods is technical analysis. It is the most useful and successful method of forex trading. Getting the right introduction to technical analysis will help you make the right decision while trading foreign currencies. Read on the following basics of the technical analysis and make your forex trading a smooth process.

Technical Analysis is the study of price movements and volume trends on the market. This technical analysis forecasts future stock price or financial price movements of the market. Technical analysis is completely a different approach; it doesn't care one bit about the value of a company or a commodity. Technical analysis focuses entirely on the stock price and its patterns. Technical analysts employ models and trading rules based on price and volume transformations, such as the relative strength index, regressions, moving averages, inter market and intra market price co-relations or circles.

Technical analysis is also referred to as chart analysis. It completely ignores the actual nature of the company, market, currency or commodity. It is solely based on the charts. Having a right knowledge on technical analysis of forex will help you to anticipate what likely is to happen to prices over time.

Technical analysis is the best method to predict short term foreign currency changes. It has the ability to generate specific information and forecasts about currencies that no other method could. In technical analysis the price connotes the value of all market participants. It also reflects the participant’s psychology. The actual price then becomes a reflection of all that could affect market price. Inflation, interest rates, supply and demand, political factors, and even market sentiment provide trends that would reflect the market price.

In technical analysis, it is assumed that the market is an extremely efficient mechanism. And it discounts or absorbs all things that affect price. It is also believed that prices move trends and create patterns in technical analysis. If we can identify the long recognized patterns then we can produce the expected results. We can recognize these patterns by mapping or charting price movement or trends. This will also enables us to predict the market behavior. The information about a financial instrument and its future direction will be reflected trending in an up or down, or a sideways pattern.

Technical analysis in forex is based on the principle of 'history repeats itself’; however, it does not result in absolute predictions about the future. Most of the traders avoid technical analysis because of its use of mathematics, but those traders who learn the technical analysis basics find it easier to invest later and pick it up in a short time.

Understanding the basics of technical analysis will help you to succeed in the world of forex trade.