The Basics of Technical Analysis
Technical Analysis is the most popular type of market analysis among professional traders. While you may not plan to dive into charts and indicators yourself, it’s always good to understand how professional traders work.
Generally, analysts define three ways of analyzing the market:
- Technical Analysis
- Fundamental Analysis
- Sentiment Analysis
You would may hear forex experts to debate which type is the best. However it doesn’t really matter as a good trader usually relies on combination of the three. Let’s take a closer look at Technical Analysis.
What is Technical Analysis
Technical analysis aims to determine the future trend of movement of a currency based on current and previous price movements. Hence, it’s directly connected with charts, patterns, indicators etc. It’s a popular type of analysis because it’s relatively quick and it has been proven to work. Technical analysis is based on the theory that historical price movements can determine the current trading conditions and potential price movements. It is proven again and again that history tends to repeat itself, that’s why technical analysis is so popular.
Charts are the easiest way to visualize historical data and see how the value of currency was changing in the past. As the majority of forex traders look for certain price levels and chart patterns relying on technical analysis, it becomes likely that these patterns will manifest themselves in the markets. However, this does not mean that different traders would have the same view about how price would move in the near or far future. Technical analysis is by default a very objective method of analysis. There are so many technical indicators that someone could use that is almost impossible for all of the traders to think of the same.
Many technical analysis techniques will only work in specific conditions. Technical analysis can also give traders an insight into turning points and potential entry points, by showing what is likely to happen in a certain set of circumstances, or what may happen if you follow the opposite trade. The main evidence for using technical analysis is that, theoretically, all current market information is reflected in price.
Technical analysts look for similar patterns that have formed in the past, and will form trade ideas believing that price will act the same way that it did before. The important thing is that you understand the concepts under technical analysis so you can use Fibonacci, Bollinger bands, trend indicators or pivot points. You can see how a chart with several indicators would look like on the above picture.