Technical analysis basics are a good starting point in learning how to trade currencies with care.
Technical analysis is one of the two methods of analysis used for forecasting the movements in foreign currency trading. The other method is fundamental analysis, which uses the economic and political data of a country to predict its currency movements.
Foreign currency traders consider fundamental analysis as difficult because it requires them to have considerable knowledge of economic and political data, in addition to an expertise in interpreting the data. On the other hand, technical analysis uses historical data to predict a currency’s movements.
Technical analysis uses several tools such as charts to study and predict the foreign exchange market’s movements and trends. Before you can start to develop and implement this kind of analysis, you should first learn the basics.
Technical analysis basically involves three principals. The three principals are market price, chart patterns, and concept of trend. Study more about technical analysis of forex.
Here is a basic description of the three principals:
- Market action– A price chart is the tool used to predict the future trends in a currency’s price. This principal explains that a currency’s price is the result of the market changes in the law of supply and demand. Changes in the economic, political, and psychological factors of a country will influence the price of a currency. The changes in the price charts are the result of the foreign exchange traders’ reactions to those factors.
- Chart patterns– This consists of market patterns reflecting a currency’s optimistic prospects of rising prices or pessimistic prospects of falling prices within a period of time. The reactions of foreign exchange traders to changes in supply and demand are the main influence affecting the market patterns.
- Concept of trend– This principal explains that market prices are the main influence of a trend, whether it goes in an upward, downward or sideway trend. A technical analyst will monitor the price actions in the market to identify the trends in the early stages of their development. The analyst will continue to chart the trends until they will show signs of reversal.
Another important component of technical analysis is the tools used to predict the movements and trends. A commonly used tool is the chart – which can be a line chart, bar chart, or a candlestick chart.
Here are brief descriptions of each:
- Line chart– This chart plots the price of a currency for a period of time, which can be daily, weekly, monthly, and yearly. A line chart’s only disadvantage is its inability to report price gaps.
- Bar chart – This chart consists of four important price points: the top point, the low point, the opening price, and the closing price.