This article looks at technical analysis in the foreign exchange market.
When entering the foreign exchange market, it is imperative you are aware of the different types of analysis. There are two primary methods from which you can choose, technical analysis and fundamental analysis, with the most popular being technical analysis. Of course, this will be completely foreign if you have not gained some forex training, but even if you have there are some points which must be remembered. These will be detailed below.
1. Technical analysis is based on the belief that all foreign exchange market movements follow a trend
Unlike fundamental analysis that utilises the macro-systemic influences on the forex market, technical analysis looks at the factual data of the market on which to base market movement analysis. This type of analysis will evaluate currency movements by examining the historical information generated by market activity such as past price patterns.
The trader uses this information in an attempt to predict future currency movements as technical traders; both long and short-term, feel that the past price behaviour is more than likely to reoccur. It is thought that if a trend or pattern is established as repetitive then the currency will head in that direction again.
2. Technical analysis is based on the belief that the foreign exchange market discounts everything
This factor is very closely linked to the belief that all currency movements will follow trends. Unlike the fundamentalists who feel currency is based on external factors such as forex news, the technical traders argue that these fundamental factors are of no use. They feel that the price movements are affected by historical data and trend patterns exclusively, and the analysis of this data is the best method of predicting market movement.
3. Technical analysis is based on the belief that history will repeat itself
The technical analytical belief that market movements will repeat themselves has roots in trading psychology. It is thought that traders have similar responses to particular stimuli; therefore this example when coupled with repetitive patterns in historical data can confirm the assumption that market movements will repeat themselves.
However, there are forex traders who feel that fundamental analysis is a more effective means of analysing market movements. This has led to debates regarding the efficiency of the methods and their place in the foreign exchange market. Generally, the type of method chosen depends on the trader and it is recommended that one has knowledge of both fundamental and technical analysis.
Additional information on technical analysis
Although technical analysis is associated with the foreign exchange market, it can be used in any of the financial trading markets. This includes the stocks, commodities and futures markets. This is because one is analysing historic data of the particular market’s movements and not focusing on the impact of different factors influencing currencies, as is seen in fundamental analysis.
Technical analysis is used by the majority of new traders as it is simple to understand and easy to use when entering the foreign exchange market. However, one must be aware of all different trading tools if you are to become a successful trader.