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Home  >  Forex technical analysis


Forex technical analysis



FOREX analysis is divided into two types: Fundamental and Technical. Fundamental analysis attempts to predict movements in currencies by examining current political and economic events. Technical analysis uses historical economic data to predict movements in the FOREX. These two articles will examine the principles of technical analysis and the tools involved.

These main categories of technical analysis will be described in this site:

 

Some studies have shown that technical analysis has limited predictive ability of future trends. However, technical analysis remained an integral part of determining the course of the market as it serves as the reflection of the theory that prices fluctuates according to trends that are determined by investors' perception of the monetary, psychology and economic outlook.

This is perhaps why the use of technical analysis has spread to commodities, currencies and other markets from its initial use in the equity market. In his book 'Technical Analysis Explained', author Martin J. Pring stated, "When holding periods are lengthy, it is possible to indulge in the luxury of fundamental analysis, but when time is short, timing is everything. In such an environment, technical analysis really comes into its own."

The term 'technical analysis' may seem daunting to new investors, but it really is the study of charts by using quantitative techniques to forecast upcoming market trends. By observing how previous market behaves through various sources and timeline, one will gain enough insight to see where the market is headed next.

The earliest model of modern-day technical analysis is the Dow Theory by Charles Dow in the 19th century. In technical , an investor is only interested to know which direction the price is gravitating to, judging from past perfomances, rather than why they move in such a way, as in a fundamental analysis that takes into consideration factors such as business management, poor earnings and low demand. Unlike fundamental factors that provides delayed movements, technical analysis is always ahead of the trend, so investors can set safe exit points and stop loss.

Price patterns and movement trends can be identified and used to investors' gain in a number of ways, but the underlying principles of technical analysis never changed. The three important principles in technical analysis are as follows:

Prices Move In Trends

By monitoring past trends, investors are able to spot repetitive patterns or trends that tend to repeat themselves consistently. Trends can be bullish (increasing), bearish (decreasing) and constant (trendless). Using these trends, the lowest and highest points possible in the market are identified to which investors can safely profit from within.

History Repeats Itself

Chart patterns that are identified to keep repeating themselves only proved that the human psychology will act the same way when presented with similar scenario. Apart from human behavior, economic and politic situations are also known to repeat itself and subject to cycles. Hence, technical analysis is a timeless tool that is applicable in the past, present and well into the future. Certainly, a chart with a longer time frame will be more accurate than a short term chart.

Market Action Discounts Everything

Although technical analysis is not interested in how the economic, political and psychology impacts the market, these factors will collectively overwhelm what is indicated by technical analysis. That is why it is essential to note that technical analysis is a study of probability, and there's no guarantee of its outcome. Martin. J. Pring summarized it best by saying, "Technical analysis deals in probabilities, never certainties."

As a conclusion, technical analysis is not without its flaws, like other kinds of indicators. No single indicators are powerful enough to foretell the future market as they all belong to the same piece of puzzle that is to grasp the movement of the economy.

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