Principles Behind Technical Analysis

The purpose of this article is to provide an insight into technical analysis in foreign exchange, one of the two major methods of analysis used to forecast and analyze the behavior of the market. Although technical analysis and fundamental analysis differ a lot, but most traders combine a mixture of both together as forecasting tools, for better results. The main purpose is the same - to predict a price or movement. Let us now focus on the principles behind technical analysis, which is the main objective of this page.

Technical analysis in foreign exchange is a method used to predict price movements and future market trends. By studying charts of past market action, the technical analysis concerns itself with what has actually happened in the market, rather than what should happen. Taking into account the price of instruments and the volume of trading, charts are created from that data to use as the primary tool. One of the major benefits of technical analysis is that it allows the experienced traders to follow many markets and market instruments simultaneously.

The three essential principles behind technical analysis are as follows:

1. Market action

It means that the actual price reflects everything known to the market that could affect it. The supply and demand, political factors and market sentiment are some of the factors.

2. Price movement

Technical analysis helps in identifying patterns of market behavior which are noted for their significance. Most given patterns have a tendency to provide the expected results. Moreover, some recognized patterns tend to repeat themselves on a consistent basis.

3. History repeats

Recognized , categorized and followed for over 100 years, the foreign exchange chart repeat themselves in a certain manner, leads to the conclusion that human psychology has changed little over time.

The five categories followed in foreign exchange technical analysis theory are - Indicators, Number theory, Waves, Gaps and Trends.

Some of the main advantages of technical analysis in online foreign exchange are that it can be used to forecast movements of any kind of asset available for trading. It is valid at any price level for it focuses on what is happening. As pure technical analysis is based on objective tools, concentrating on prices, it neutralizes the external factors. Using technical analysis in foreign exchange online, the trader is easily able to maximize his profits and reduce his losses.

Technical analysts believe that all the information they need about an investment can be found in its charts. Taking a short-term approach to analyze the market, the critics of technical analysis state that the market price is always the correct one, thus making any historical analysis useless.