What is Technical Analysis in Forex, and What is its Application?admin 6 July 2021
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In Forex, technical analysis is an analytical method for analyzing and predicting price direction by studying past market data, primarily price and volume.
Forex trading is an attractive and tempting market for many investors, and it offers traders many trading opportunities. Despite all of these opportunities, many traders in the markets do not achieve positive and ideal results. In fact, a high number of forex traders lose their capital.
Learning about Forex trading methods and tools is essential for success in trading. They help you enter this exciting market with a more open and accurate view. In this article, we focus on technical analysis, which one of the most profitable trading tools. To learn more about this concept, we have provided you with good information in the following.
History of technical analysis
Technical analysis is about three centuries old. The use of technical indicators and the drawing of technical diagrams happened in the seventeenth century for the first time. It seems like the first person who used this analytic method directly in economics was Charles Dow.
Charles Dow, the founder of the Wall Street Journal, also designed the Dow Jones Industrial Average. Despite its shortcomings and criticisms, this average has remained one of the most important economic indicators over the years.
Definition of technical analysis
Proficiency in technical analysis means detecting when the price trend is changing at the beginning of the price movement and surfing on the new price wave. Before new evidence shows that a new trend is emerging, technical analysts will notice the trend changes and act faster than other traders and make new decisions.
Technical analysis in the Forex market refers to a platform on which traders study the price movements. Based on this theory, a trader can significantly predict the current trading conditions and potential price movements by observing and investigating the price movements in the past.
in the following, you can see the some definitions about this type of analysis:
- It refers to investigating and analyzing price fluctuations in the past to predict future price changes.
- This method analyses market behaviors by studying price charts, moving average prices, total trading volume and open trading volume, pattern formation and other technical indicators.
- It is a method for predicting prices based on price pattern fluctuations and changes in trading volume without considering the fundamental factors of the market.
Technical analysts look for similar patterns that have emerged in the past. They adjust their trading style based on them and believe that the market will probably follow the past patterns.
Technical analysis helps us perceive the market sentiment, trading prospects and the psychology of traders. Investigating a market using technical analysis means focusing on price fluctuations in the market, apart from focusing on the offered goods or services.
How to study past price movements?
In the world of business, charts are the first things that come to mind when someone speaks of technical analysis. Technical analysts use charts to investigate past price trends because it is the simplest way to observe past market behavior.
The study of past data helps you find trends, patterns, outstanding trading opportunities and golden positions in the future. You should keep in mind that technical analysis is not a fixed fact and depends on the analyst mentality. Because when two traders look at a particular chart, they don’t necessarily have the same perception, strategy, or price prediction.
Related Article: How to trade Forex with $100?
Principles of technical analysis
Based on Dow’s modern theory technical analysis has three basic principles, as following:
- The price of each share includes all the required information. This principle can be considered the basis of technical analysis. It means that you do not need to investigate news, fundamental and economic subjects, or anything else to analyze markets. All of this can be seen in the charts before they happen, and the effect of these events on prices and charts can be predicted.
- The price of each share changes based on a particular trend. This means that prices start moving upward or downward and continue to move in the same direction until a factor changes the current trend. Consider the fact that identifying price movements in technical analysis is determined using a series of drawing tools.
- The past always tends to repeat itself. According to the principles of psychology, the social behaviors of individuals such as fear, anxiety and greed in buying and selling are always repeated over time. This principle is the basis for forming classical chart patterns, some of which have been used for many years by most analysts.
You can use technical analysis in all financial markets and on any price and value chart with different time frames. For example, you can use technical analysis in the international stock market, Forex, gold and cryptocurrencies.
Fibonacci analysis, candlesticks, Elliott waves, support and resistance lines are some of the most important and widely used technical analyses.
Using technical analysis can help you to have a better and broader view of the markets and always be a few steps ahead of others in your trades.
If you want to invest professionally in the stock market, you must first learn the analytic techniques, which will make you more successful in trades. You should keep in mind that using the right time frames based on your trading strategies guarantees your success.
There are many methods in the technical analysis of markets, and each one has its own advantages and disadvantages. So, it is not possible to recommend a method as the best one. Selecting an analytical method depends on the trader’s strategy.
In the end, we should say that the correct use of technical analysis methods and the correct understanding of market behaviors will have surprisingly positive results for investors.