What is Technical Forex Analysis
What is Technical Forex Analysis
The Technical Forex
analysis is about what has actually happened in the forex market, rather than
what should happen.
A Technical Forex
Analyst will study the price and volume movements and from that data create
charts (derived from the actions of the Forex market players) to use as his
primary tool. The Technical Forex Analyst is not very concerned with any of the
“bigger picture” factors affecting the forex market, as is the fundamental
forex analyst, but concentrates on the activity of that instrument’s market.
Technical Forex Analysis is based on three underlying principles:
Forex Market action
discounts everything
This means that the
actual Forex rates is a reflection of everything that is known to the Forex
market that could affect it, for example, supply and demand, political factors
and market sentiment. The pure Forex Technical forex analyst is only concerned
with Forex rates movements, not with the reasons for any changes.
Forex Rates move in
trends
Technical Forex
analysis is used to identify patterns of forex market behavior which have long
been recognised as significant. For many given patterns there is a high
probability that they will produce the expected results. Also there are
recognized patterns which repeat themselves on a consistent basis.
History repeats itself
Chart patterns have
been recognized and categorised for over 100 years and the manner in which many
patterns are repeated leads to the conclusion that human psychology changes
little with time.
List of categories of
the technical Forex Analysis theory:
•
Indicators (Oscillators, eg: Relative
Strength Index RSI)
•
Number theory (Fibonacci numbers, Gann
numbers)
•
Waves (Elliott wave theory)
•
Gaps (High-Low, Open-Closing)
•
Trends (Following Moving Average)
•
Chart formations (Triangles, Head &
Shoulders, Channels)
Fundamental or
Technical Forex Analysis?
When day trading, a
Forex trader makes the decision about what to trade, when to trade, and how to
trade, using either fundamental or technical Forex Analysis. Both forms of
Forex Analysis involve looking at the available information and forex making a
decision about the future price of the Forex market being traded, but the
information that is used is completely different. Is it possible to use both
fundamental and TechnicalForex Analysis together, but it is more common for a
Forex Trader to choose either one or the other.
Fundamental ForexAnalysis
Fundamental Forex
traders use information about the global and national economies, and the
financial state of the companies involved, as well as non financial information
such as current political and weather information. Fundamental Forex traders
believe that the Forex markets will react to events in certain ways and that
they can predict future Forex market prices based on these events.
For example, a Forex
Trader for a given currency pair studies the supply and demand for the
country's currency, products or services; its management quality and government
policies; its historic and forecasted performance; its future plans and the
most important for the shorter term, all the economic indicators.
From this data, the
Forex Trader constructs a model to determine the current and forecasted value
of a currency pare. The basic idea is that unmatched increases in supply tend
to depress the currency value, while unmatched increases in demand tend to
increase the currency value. Once the Forex Trader estimates natural value, he
compares it to the current exchange rate and decides whether the currency ought
to rise or fall.
Fundamental forex
traders need access to all of the available information as soon as it is available,
and are therefore often institutional forex traders with large support teams,
rather than individuals. Fundamental Analysis has probably been in use since
there were markets to trade, and has traditionally been done manually, but as
computing power increases it has become possible for some fundamental
information to be processed automatically.
Technical Forex
Analysis
Technical Forex Traders
use Forex trading information (such as previous prices and trading volume)
along with mathematical indicators to make their Forex Trading decisions. This
information is usually displayed on a graphical chart and is updated in real
time throughout the trading day. Technical Forex traders believe that all of
the information about a Forex market is already included in the price movement,
so they do not need any other fundamental information (such as earnings
reports). There are many different types of charts and many different
mathematical indicators. Some indicators are better suited to short term Forex
trading, and others are better suited for longer term trend following Forex
trading. Individual Forex traders are usually technical Forex Traders.
Technical Analysis appears to have been used at least 200 years ago in Japan.
ModernTechnical Forex Analysis is usually performed by the Forex trader
interpreting their charts, but can just as easily be automated because it is
mathematical. Some Forex traders prefer automatic analysis because it removes
the emotional component from their Forex trading, and allows them to take
trades based purely on the Forex trading signals.