Technical analysis is the study of historical price action with the aim of spotting trends and patterns and determining probabilities of the future direction of price.
Technical traders (also known as technical analysts) believe that all important information about price movements lies within the charts. They believe that by looking at historical price movements, one is able to determine the current trading conditions and potential price movements. How?
Technical traders look for similar patterns that have formed in the past and form trade ideas based on the belief that price could possibly act the same way that it did in the past.
Using Technical Analysis To Trade The Forex Markets
Charts, or more specifically, price charts, happen to be the first (and most important) tool that every trader using technical analysis needs to learn. No matter their trading strategy, technical traders analyse these price charts in order to spot patterns, trends, find entry & exit points, predict price movement and more. These are the four most popular types of price charts used to trade foreign exchange:
Examples Of Technical Analysis Tools
Now that we have covered the definition of technical analysis, let's discuss some of the most popular ways technical analysts identify patterns and make predictions about future price movements in the Forex market. These fall within the following three categories:
Chart patterns, perhaps better known as trading patterns, are shapes within price charts that play an integral part in helping traders predict what prices might do next, based on what they have done in the past.
To identify and spot chart patterns, technical analysts connect common price points, e.g. closing prices or highs or lows, during a specific period of time using drawing tools such as horizontal lines, trend lines, and more.
Chart patterns can be based on seconds, minutes, hours, and even days or months and can be applied to all chart types - line, candlestick, and bar Forex charts.
Some of the most popular chart patterns include wedges, head and shoulder formations, double and triple tops and bottoms, and flags.
Candlestick patterns are powerful indicators used by Forex traders to predict the future direction of price movement and identify potential trading opportunities. Traders identify these patterns based on historical price data and trends.
Candlestick patterns are formed by grouping candlesticks in a certain way. Whether it's a reversal or continuation signal, candlestick patterns provide traders with an idea of what may be coming next.
Forex technical indicators, or technicals for short, are an essential tool when trading the Forex market. These indicators provide traders with a better chance of making profitable trading decisions if used at the right time.
There is a wide variety of technical indicators out there to analyse trends, provide price averages, measure volatility, and they come in all shapes and sizes.