Technical analysis in Forex trading is used to study financial markets with a help of graphs and charts. The target of the technical analysis is to predict future price behavior. As a rule, the price forecasting is based on the historical rates and current market situation. Technical analysis includes several approaches to study the dynamics of price behavior.
A research of the future behavior of Forex prices in technical analysis is based on three market criteria – price, volume and number of open positions. The main factor for technical analysis is prices. The other criteria are studied in order to confirm the accuracy of price dynamics.
Let’s look on the main three axioms of technical analysis theory:
1. Market “sees” everything. This axiom is the most important in the theory of technical analysis. Its understanding is important for a correct understanding of all methods of technical analysis. The basic meaning of this postulate is that any criteria (political, economic, psychological), affects the prices and is recorded in the Forex charts. In other words, any change in prices is the result of changes in external factors. Means that every trader must carefully monitor and study the price dynamics when trading Forex online.
When analyzing price charts and using different indicators, a Forex trader comes to the conclusion that the market itself shows him the most likely price direction (rising, falling, neutral). This approach is different from the fundamental analysis, which focuses on the study of factors. Only after the evaluation of external factors traders may make conclusions about the market future movements. They have to consider a complex of different factors disregarding the price criteria. As you can see, the technical analyst’s priority is a price rather than any external factors.
2. Price movements are done in trends. This axiom is the basis for the formation of all methods of technical analysis as Forex market is a subject to trends and can be objectively evaluated. As Forex market movements are done in trends, we can see two scenarios: the first one is that a trend is likely to be further developed and will not turn to the opposite direction. The second scenario is that current trend may continue until the reverse process begins.
3. History repeats itself. The theory of technical analysis and research on Forex market dynamics are closely connected with a study of human psychology. For example, the graphs of price movements that were created and analyzed over the past 100 years reflect the major features of the psychological state of the market. First of all, the graphical interpretation indicates the type of mood that prevails at present in the market (bullish or bearish type of mood). Consequently, if in the past these models worked effectively, there is a reason to believe that in future they will work successfully too as their foundation is built on the human psychology that remains almost unchanged over the years. The motto of Forex trading is: The key to the future is a study of the past.