The Basics of Forex Technical Analysis
Technical analysis is one of the two methods of analyzing Forex; fundamental analysis is the other. These two methods are very important in the Forex trading by forecasting the variations of the Forex market, prediction of the price and the movement of the market. Although technical analysis and fundamental analysis differ greatly, they both predict a price or movement. In this article, Forex technical analysis will be analyzed in detail.
Technical analysis is a method of forecasting price movements and future market trends through the study of past market action which take into account price of instruments, volume of trading and open interest in the instruments. Unlike fundamental analysis, technical analysis is focused with what has actually happened in the Forex market, rather than what should happen. There are certain technical analysis tools such as the relative strength index (RSI), which is a price-following oscillator that ranges between 0 and 100; the Elliott waves method, which deals in the prediction of the market movement by the study of wave patterns over a period of time; the parabolic SAR methodology, in which the prices are examined and compared to stop and reversal numbers which are an indication of entry points and exit points for any Forex trade; the stochastic oscillator, which shows the over bought or oversold currencies on a scale of 0- 100%; and gaps, which denotes the spaces on the bar chart that none of the trading takes place.
Technical analysts are confident that historical performance of stocks and markets denote future performance. They use charts and other tools to identify patterns that can suggest future activity. They do not attempt to measure a security's intrinsic value. They study the price and volume movements. And they create charts from that data. A technical analyst would rather sit on a bench in a certain mall and watch people going into the store. He decides basing on the activity of people going into each store. But if he is a fundamental analyst, he would rather go to each store and study the products on sale. Later he decides whether to buy or not. In other words, technical analysts disregard the intrinsic value of the products in the store. From the point of view of technical analyst, anyone can gain the profit by posing himself in the trend direction. Consequently, they use different patterns in order to create the price chart that will suit the future market and the price would follow the pattern.
In summary, Forex technical analysis focuses on what actually happens in the market. The charts are based on market action involving price, volume and open interest. It is always focused with the pricing and time factors rather than the factors affecting the market. Thus technical analysts study the effects, not the cause of market movement.