About Forex Technical Analysis

Technical Analysis | by ForexCycle.com | Thursday, 07 February 2008 20:51 UTC

Forex or Foreign Exchange is the largest international market for trading of foreign currencies between large banks, money speculators, financial institutions, multinational corporations and government. The market essentially is a reflection of how international currencies fare against each other in a day's trade.

There are many ways to predict the market and how the currencies will trade in a day. One of the strongest trade forecasting methods is Forex Technical Analysis where the past data of the market and the prices is used to determine the future trend and price movements. The Forex technical analysis is based on a number of tools that utilize a number of parameters.

We all know that any market is influenced by an array of causes budgets, political volatilities, wars and even a natural disaster. The form of market forecast based on a study of causes is called fundamental analysis. As you may understand that a study of the past price trends to predict future movements can never ignore the cause factor. Hence the method of technical analysis makes some fundamental assumptions regarding the causes that affect the market.

  • That the effect of any cause that affects the market is reflected in the actual data. So a study of the actual data is more encompassing than studying the cause.
  • That history repeats itself. Market data from past reflecting the affect of any particular cause will help the present day technical analysts predict the future trend under similar circumstances. The market moves in a predictable trend.

Keeping these basic assumptions, the method of Forex technical analysis uses charts and indicators based on different parameters to predict the future market trend. There are a number of Price charts in the form of bar charts showing price pattern over time. The basic price charts are enhanced by using colored bars in candlestick patterns and by plotting market changes in price direction in point and figure patterns.

The indicators used in Forex technical analysis are trend indicator to show price movement in one direction, strength indicator to indicate the strength of the market, volatility indicator to describe the daily fluctuations, momentum indicator to indicate the speed in which a price moves and cycle indicator to indicate repetitive patterns.

The technical analysis being a thoroughly mathematical method it uses a number of established mathematical theories and formulae to predict the market. The most commonly used are Fibonacci series where adding the first two numbers you get the third, Elliot wave theory based on Fibonacci series and repetitive wave patterns and W.D. Gann's numbers using time-price relationship.

As with any financial forecasting method, there are some tips that can come handy while trading.

  • Read your charts and data thoroughly but do use the technical tools before you enter a trade.
  • Be very disciplined in your trading. If you are losing on some trade don't hold on to it for a long time hoping that it would turn around. Stick to your initial trading plan.
  • Remember charts and numbers are not the keys to your success in the market. The key is in being able to manipulate the mathematics based on the time period and the currency you are dealing with.

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