FOREX Technical Analysis - Part I

Most FOREX traders rely heavily on technical analysis and also use fundamental analysis to support their trading strategies.

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There are two types of FOREX analysis: Fundamental and Technical. As pointed out in the Introduction to Fundamental Analysis, in the FOREX arena fundamental analysis attempts to predict movements in currencies by examining current political and economic events. Technical analysis, on the other hand, uses historical economic data to predict movements in the FOREX. These two articles, Part 1 and Part 2, will examine the principles of this technical analysis and the tools involved.

Basic Principles of Technical Analysis

Technical analysis is based on three factors:

Price movements are the result of all possible market forces combined. Things that might affect currency prices include political events, economic conditions, supply and demand, seasonal variations and weather conditions. The technical analyst, however, is not concerned with the reasons for market movement, but rather, the movements themselves.

Currency prices, like other investments, follow trends. Many market patterns have been recognized as having predictable consequences.

Price movements follow historical trends. FOREX data has been available, and has been collected for over 100 years. As a result of this, recognizable patterns have emerged over time. These patterns are based on human psychology and the way people react to certain sets of circumstances.

Is Technical Analysis Necessary To The FOREX Trader?

To tell the truth, most FOREX traders DO rely heavily on technical analysis and may also use fundamental analysis to support their trading strategies.

A major advantage technical analysis has over fundamental analysis is that it can be applied to many different markets and currencies at the same time. Fundamental analysis requires in-depth knowledge of particular political and economic conditions of a certain country; therefore it is a bit less likely that any one trader can do proper fundamental analyses on more than a few countries.

The novice trader may be put off by the apparent complexity of technical analysis and wonder if it is really necessary for FOREX trading.

As with any investment, sensible currency trading requires a viable FOREX strategy.

Although many strategies are possible, technical analysis is a proven method for predicting movements in the FOREX.

However, does that mean it's a perfect predictor of success?

Well, we all know that nothing is 100% certain, and currency prices will remain affected by a variety of forces no matter what technical knowledge and analysis may predict. This is the reason many traders use a combination of technical and fundamental analysis to plot their trading strategies.

Availability of Charts for the FOREX Trader

A online FOREX broker should provide access to a wide variety of charts for technical analysis. While some charting software is available free of charge, in-depth professional charts may carry a monthly fee. Charts can be viewed by various time scales and should provide detailed information about price movements as well analytical overlays. Good charts can be zoomed in to the tick level or zoomed out to see the broad picture over a period of months or years. Charts should be, and generally are, updated in real time. Yesterday's figures may be good for some information, but you will usually want the most up-to-date data available.

FOREX charts may be available as a service on your broker's web site or may be included as part of their FOREX trading software package.

Market Behavior Matters

Before beginning in FOREX trading it is a good idea to become accustomed to market behaviour by following charts for a period of time and studying their movements and learning about trends. Many brokers provide practice accounts that can be used by beginners to place 'paper' bids – no real money is exchanged. These demo, or practice accounts, familiarize the beginning trader with FOREX charts and market movement while at the same time allowing him to become acquainted with the trading software a particular broker uses.

Part 2 of this article will look at the various kinds of charts and technical indicators which may be available.

FOREX Glossary

FOREX Trading

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