Forex technical analysis is one of the two major methods of analysis used to forecast the behaviour of the Forex market; fundamental analysis is the other. Technical analysis and fundamental analysis differ greatly, but both can be useful forecasting tools for the Forex trader.

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Although technical analysis and fundamental analysis differ greatly, they are both used to forecast the variations of the Forex market and predict a price or movement of the market. The technical analyst studies the effect while the fundamentalist studies the cause of market movement. Many successful traders combine a mixture of both approaches for superior results.

Technical analysis is the most critical part of any form of trading including foreign exchange trading. The basic feature of Forex technical analysis is the study of historical price movements to predict future price movements. The Forex market operates 24 hours a day, and an enormous volume of data is generated every minute. So there is always more than sufficient data to work with, thus making it an ideal market to use technical tools like charts, trends and indicators.

There are a number of books available to teach you various technical analysis techniques. The purpose of this article is to touch upon the basics of Forex technical analysis tools specifically used in the Forex market. Normally, the basics of analysis will remain unchanged for different types of assets and trades.

Technical analysis is the process of market analysis that relies only on market data numbers – quotes, charts, simple and complex indicators, volume of supply and demand, past market data, etc.

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Technical analysis is a method of forecasting price movements and future market trends through the study of charts of past market action. Unlike fundamental analysis, technical analysis is concerned with what has actually happened in the Forex market, rather than what should happen and takes into account the price of instruments, the volume of trading and open interest in the instruments. Forex technical analysis creates charts from that data to use as the primary tool.

The Forex market consists of huge players in the banking and hedge fund sector. They always have highly advanced monitoring systems with sophisticated software and hardware in place. Hence any inconsistencies between various currency pairs is quickly detected and rectified within a very short period of time. As a result of this their analysis is always sought after by other traders. In any case the day to day capital flow is so huge and so many people are involved in the exchange of money that it is the trend that is of vital importance and not the small fluctuations in price.

Another aspect of technical analysis in the Forex market is to determine whether a certain currency pair will show trends in a certain direction or would it show movement within a range by moving sideways. The usual method to find this out is to draw historical trend lines to determine the previous rates that bound the higher or lower levels. These can be called support or resistance levels which are used to predict whether a trend or a range will continue or not.

One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.

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Forex Technical analysis is built on three essential principles:

1. Market action discounts everything! This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.

2. Prices move in trends. Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also, there are recognized patterns that repeat themselves on a consistent basis. Technical analysts believe price fluctuations are not random and unpredictable. Once an up, down or sideways trend has been established, it usually will continue for a period of time.

3. History repeats itself in regular, fairly predictable patterns. Forex chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time. These patterns, generated by price movements, are called signals. A technical analyst’s goal is to uncover a current market’s signals by examining past market signals.

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Forex charts are based on market action involving price. There are five categories in Forex technical analysis theory:

• Indicators (oscillators, e.g. Relative Strength Index (RSI) which is a price-following oscillator that ranges between 0 and 100)

• Number theory (Fibonacci numbers, Gann numbers)

• Waves (Elliott wave theory which deals in the prediction of the market movement by the study of wave patterns over a period of time)

• Gaps (high-low, open-closing)

• Trends (following moving average).

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All the major currency pairs linked with the American Dollar like Euro/USD, USD/Pound, INR/USD, USD/Yen or Yuan/USD etc have shown distinct trends in the past. On the other hand, the pairs not related to the U.S. dollar tend to become bound in ranges. Every trader needs to be aware of such trends and ranges so that they can decide which pair should be traded and what strategies should be utilized.

The Forex market possesses tremendous opportunities as well as enormous risks. So, technical soundness becomes the key to success. Various simulation softwares are available to give you a feel of the market. Similarly you would find various trading softwares to give you real time currency movement data. But it is always necessary to brush up on your basic theories before getting into those.

The main idea behind Forex technical analysis is the postulate of functional dependence of the future market technical data on the past market technical data. Both fundamental analysis and technical analysis are believed to be stand alone analysis methods and self-sufficient. Furthermore, it is believed that you can use each on their own to successfully trade Forex. In practice, both analysis methods are used together to different degrees.

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