The forex technical analysis is concerned
with what has actually happened in the forex market, rather than what
should happen.
A technical analyst will study the price and volume
movements and from that data create charts (derived from the actions
of the market players) to use as his primary tool. The technical
analyst is not much concerned with any of the “bigger picture” factors
affecting the market, as is the fundamental analyst, but concentrates
on the activity of that instrument’s market.
Technical analysis is based on three underlying principles:
1. Market action discounts everything
This means that the actual price is a reflection of everything
that is known to the market that could affect it, for example,
supply and demand, political factors and market sentiment.
The pure technical analyst is only concerned with price movements,
not with the reasons for any changes.
2. Prices move in trends
Technical analysis is used to identify
patterns of market behaviour which have long been recognised
as significant. For many given patterns there is a high probability
that they will produce the expected results. Also there are
recognised patterns which repeat themselves on a consistent
basis.
3. History repeats itself
Chart patterns have been recognised
and categorised for over 100 years and the manner in which
many patterns are repeated leads to the conclusion that human
psychology changes little with time.
List of categories of the technical analysis theory:
- Indicators (Oscillators, eg: Relative Strength Index
RSI)
- Number theory (Fibonacci numbers, Gann numbers)
- Waves (Elliott wave theory)
- Gaps (High-Low, Open-Closing)
- Trends (Following Moving Average)
- Chart formations (Triangles, Head & Shoulders, Channels)
See also: Forex fundamental analysis |