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Technical Analysis: Understanding the Basics

Commodities under pressure as Dollar hit two-month highTechnical analysis and Fundamental analysis are two methods used by traders to analyse the forex market. While fundamental analysis involves analysing the macro economical aspects, technical analysis analyses price movements and their trends.

What Is Technical Analysis?

Technical analysis is a method of analysis that makes use of technical tools and indicators to analyse the market. Historical prices and patterns are used to predict the future trends. Charts, indicators and other tools are used by traders to get an insight into the Forex market that protects them from the pangs of losses. Tools of technical analysis are available in the trading platforms which are provided by Forex brokers.

Basic Assumptions

Technical analysis is mainly about studying demand and supply in the market. Price and volume are important aspects of technical market analysis. Technical analysts identify patterns that are used to predict future trends.

Traders who use technical ways to analyse a market, mainly follow three basic assumptions on which the technical analysis is based:

  1. All the economic factors and investor’s psychology which affect the market are reflected in the prices. This the first assumption on which technical analysis is based.

  2. Price movements follow a trend. Therefore, once the trends are set, the price movement is maintained in a particular direction. The prices do not move against the trend.

  3. History repeats itself. It is believed that price movement and trends have repetitive nature. Analysts analyse the charts and market movements of previous years that they believe to be relevant. This helps them to understand trends and predict the future.

Trends in the Forex market

Trends show the direction in which the market is moving. Trends do not move in straight lines. As the forex market moves rapidly, the trend will show high points and low points. Uptrends, downtrends and horizontal trends are three types of trends. When the price moves in the upward direction, it is called an uptrend. Succeeding peaks and dips in the prices will be higher in comparison to the former ones in a standard uptrend.

Downtrend shows the price movement in the falling direction. Successive peaks and dips in a standard downtrend will be lower than the former ones. Horizontal trends, as the name implies, do not show a clear upward or downward trend. The price moves horizontally, showing both ups and downs.

Trends last for a specific time period in the market. Trends can be classified as long-term, intermediate or short term on the basis of trade length. A trend that lasts longer than a year is known as a major trend. Short terms are last for very small period. Intermediate trend can stay for few months. Many intermediate trends together make a long term trend. Charts are used in technical analysis analyse the trends.

Technical Analysis Tools

Trendlines

Fibonacci Retracements

Moving Averages

Oscillators and Momentum Indicators

Bollinger Bands

Japanese Candlesticks

 

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