What is Forex Technical Analysis?
There are two mainstream types of analysis in forex trading – forex technical analysis and non-technical, which also is more than often referred to as “fundamental”. Analysis is exactly what sets apart trading from gambling. Placing trades without analysis would be the same as throwing dice or flipping a coin. Actually, chances for success might be even worse depending on the size of the spread, but more about it later.
Fundamental analysis studies situations with a country’s economy, interest rates and political stability, among other things. On the other hand, forex technical analysis studies price action only, nothing else. It studies past movements of exchange rates in order to predict future movements. The quite appealing theory behind the technical analysis is that all “fundamental” data is already reflected in the current price, and release of a new piece of “fundamental” data will have no effect at all or random short-range unpredictable effect on the price, thus chaotic “fundamental” data should be disregarded. Technical analysis also can be seen as a tool for removing emotions from your trading decisions – an extremely important thing in any trading environment.
According to technical analysis, there is nothing new under the sun, the past will repeat itself again and again, and patterns of price action in the past can be recognized, analyzed, and future movements can be predicted more or less accurately. This is the theory, and at first it may seem like real lunacy. But chances are, the more you become familiar with technical analysis, the more you will like it. Especially considering quite complex and unproven theories behind “fundamental” approach to valuation of currencies (speaking of “convoluted”), which makes technical analysis even more appealing to the traders.
The more we use technical analysis, the more we see it as some rational island, if you will, amid a chaotic sea of emotions-based trading. The sooner you learn to put your emotions aside while trading the better. Your account will thank you many times over. Unfortunately, this is much easier said than done. Make sure to review Risk Management part on this site prior to risking any of your hard-earned money by trading currency live.
Different charts and indicators are used for technical analysis. These charts are simply graphical representation of price movements over any given period of time. The time period can be 1 minute (or less) or 1 month and everything in-between.
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