Forex Technical Analysis

Technical analysts track historical prices and traded volumes in an attempt to identify trends. They use graphs and charts to plot this information, and for this reason are sometimes referred to as chartists. By attempting to quantify historical performance, technical analysts seek to identify repeating patterns as a means to signal future buy and sell opportunities.

The field of technical analysis is based on three important assumptions:

1. The price of a security automatically factors in economic conditions.

   Technical analysts believe that the impact of events such as interest rate changes or the latest inflation reports are automatically factored into the currency price through the natural actions of buyers and sellers within the market.

2. When it comes to pricing, history tends to repeat itself.

   Technical analysts believe that prices move in trends and price movements generally follow established patterns that can be partly attributed to market psychology (or, more euphemistically, "herd mentality"). Market psychology is based on the widely-held belief that participants in markets, who for the most part have the same goals and objectives, react in a similar fashion when faced with similar situations.

3. Once established, trends tend to continue.

   Technical analysts look for trends as a way to predict future prices. There are three self-explanatory trends:

   • Up-trend
   • Down-trend
   • Sideways / horizontal trend

Technical analysis continues to evolve, and most trading platforms offer a host of tools to automate the calculations required to plot prices. We will review some of the more popular technical tools in the following sections.