Technical analysis is a method of forecasting price movement by data comparison in different time frames and by eliciting regularities of market behavior. Application of a technical analysis in Forex activities is irreplaceable for the most of traders.
Technical analysis is based on three general principles:
1. Market movement is taken into account by everybody
The price is always impacted by external factors, however, technical analysis implies that investigation of political, economic and psychological factors influencing the price movement is not obligatory, as the main motion indicator is the price as it is. Any slight influence of factors is considered and reflected by a price, that is why it will be the object of study.
2. Price movement moves in a certain direction
For applying a technical analysis it is necessary to comprehend the trend meaning. The main goal of a technical approach is determination of price move tendency in order to trade in compliance with this trend.
There are three trend types:
• Bullish when price moves up
• Bearish when price moves down
• Flat - has no certain price move direction
As a rule, during the price movement you can elicit each of trend types, but only one of them can be major. Worth keeping in mind that tendency change takes place only after it gives certain signals.
3. History repeats itself
This principle implicates that in the course of human history the rules and analysis types do not change, that preconditions a multiple repeating of price movement on different time intervals.
The market dynamics is primarily studied by means of charts during a technical analysis. The main tools are as follows:
• Japanese candlesticks
• Bar chart (intervals)
• Line chart
• Trend indicators
• Wave analysis
Technical analysis can be a foundational forecasting instrument in the currency market. This technique is successfully used by professional traders and analysts of Forex. Their long experience points to practicability of using technical analysis in trading.