Technical Analysis is the study of historical price movements in order to identify patterns and determine the probability of future movements by studying price movements And by using Technical Indicators and Chart Patterns .
Technical analysis focuses on using price charts to identify trend, support and comentance, and Momentum to help traders enter and trade with higher probability.
New to technical analysis? Check out the Beginner’s Guide to Technical Analysis.
Technical analysts believe that price movements are trending and that price movements often follow established patterns, which can be attributed in part to market psychology, based on the widespread belief that market participants react in similar ways when When encountering a similar situation.
Technical Analysis does not attempt to measure the underlying value of an asset but rather uses price charts and technical indicators to identify patterns that can be used as the basis for trade entry and exit.
The main difference between technical analysis and fundamental analysis is that technical analysis exclusively uses historical price and volume data .
Technical analysis focuses on the future, The best predictor of future price movements is past trading information and data.
Forex traders who use technical analysis believe that price patterns tend to repeat themselves in the future, and they analyze previous price movements of currency pairs and use these to decide when to enter and exit trades.
The first principle of technical analysis is that the price of an asset already reflects all available information , but instead focuses on the statistical analysis of price movements.
It comes down to analyzing the supply and demand of the market to determine price trends.
The main theory of technical analysis is:
- Recent price movements give you an idea of what buyers and sellers are thinking in the market.
- You can then determine whether buying or selling interest is increasing.
- This allows you to infer what market participants are likely to do next.
The field of technical analysis is based on three basic assumptions:
- The market discounts everything. The price of a currency pair automatically takes into account “fundamentals” (macroeconomic conditions) . The impact of events such as interest rate changes or the latest employment report is automatically priced into prices through the actions of buyers and sellers in the market.
- The price trend is trending
- When it comes to pricing, history tends to repeat itself.
Technical analysis attempts to achieve three main goals:
- Profit from trading by observing market patterns and statistics.
- Know when to enter and exit the market, especially when the market starts to turn.
- Avoid letting emotions affect your trading decisions.
Because technical analysis is based on trader sentiment, it only works in the auction market, where many buyers and sellers converge to a single price determined by the highest bid and lowest ask. single price price.
Technical analysis boils down to two points:
- Identify Trends.
- Identify Support/Resistance by using price charts and/or time frames.
The market can only do three things:
- move up .
- Move down .
- Move sideways .
Price usually moves in a zigzag pattern, therefore, there are only two states of price action:
- Range: When price moves sideways
- Trend: When price zigzags higher (uptrend) or price zigzags lower (downtrend)
There are 3 tools and techniques used in technical analysis:
- Price Action: Study past price action to determine clues as to where the market will go next. Includes drawing chart lines to discover how prices tend to react.
- Chart Patterns: Identify the major chart patterns that predict price direction.
- Technical Indicators: Use statistical tools to identify buy and sell signals.
Why is technical analysis important?
Technical analysis can not only help you determine when and where to enter a trade .
Also important, when and where to go out.
How to use technical analysis?
Technical analysis is based on the theory that: Markets are chaotic (no one knows exactly what will happen next), but at the same time, price movements are not completely random .
In chaotic conditions, there are recognizable patterns that tend to repeat .
This means successTrading using technical analysis is not about right or wrong
It’s about determining probabilities and taking trades when the odds are in your favor.
Part of determining probability involves trying to determine future price direction and when/where to enter a position .
But equally important is determining your risk-reward ratio.
There is no magic combination of technical indicators that will unlock some secret trading strategy.
The secret to successful trading is good risk management, discipline, and the ability to control your emotions.
Anyone can guess correctly and win occasionally, but Without risk management, it is nearly impossible to remain profitable over time.
If you want to learn more foreign exchange trading knowledge, please click: Trading Education.
