Technical analysis is the skill of using past movements and data to predict future movements. There is statistical significance to the forecast since Forex is a 24 hour market and there is therefore a large amount of data that can be used. This is the reason that technical analysis is so popular a tool in the Forex market.
Technical analysis uses price charts to try and determine whether a certain pair will trend in a particular direction. By using technical analysis rules, you may be able to predict the next direction and movement. A price chart is a two-dimensional chart with a vertical axis showing the price and a horizontal axis showing the time. The most common method used to determine when a specific pair will trend in a particular direction or travel sideways and remain range-bound, is to draw trend lines to connect historical levels where a rate has been prevented from moving higher or lower.
Technical Analysis Combined with Tools
Technical analysis can be particularly helpful when combined with other tools, such as Fibonacci levels and candlesticks. For example, if you do your technical analysis on a candlestick chart, as opposed to a simple line chart, and you take note of the candlestick’s signals, you will produce a much stronger result.
Analyzing the Charta
There are many aspects to take into account when doing technical analysis.
- Trend – This is the first thing to look out for as it shows the general direction of the price. Trends can be different in different timeframes and small trends can be found within big trends.
- Support – This is the lowest level the price can go. This level can become broken.
- Resistance – This is the level that the price will not go higher than, although the level can become broken.
Support and resistance levels are the backbone of technical analysis and everything is based on these levels, including patterns such as triangles, wedges, pennants, double and triple tops and bottoms, head and shoulders and more. Many technical traders use indicators, together with support and resistance to predict future trends in the market.