Technical analysis is a method of analyzing currency movements by examining the data generated by market activity.These data that were analyzed are usually historical data, such as previous prices and volume. Professionals called technical analysts attempt to study these given data, such that they can identify patterns that may be used to predict future price movements in the forex market.
There are a lot of techniques that analysts make use of to evaluate data.There are moving averages, trends, double tops, double bottoms, MACD, support, and resistance.
But first, there are several reasons why a lot of traders believe that this method of analysis can be a great way to predict currency movements.Basically, this kind of analysis is based on three primary assumptions:
- The prices of currencies reflect all available information, such as fundamental factors. Thus, some argue that conducting fundamental analysis wouldn’t add any value. Technical analysts believe that analyzing the price movements or the supply and demand of these different currencies is the most ideal way to identify trends in the foreign exchange market.
- The price movements tend to follow a specific trend. With this, previous price behaviors are likely to occur again. Moreover, if a trend has already been established, it is more likely that the currency will continue in the similar direction.
- In relation to the idea that prices follow trends, technical analysis also assumes that history repeats itself. This assumed repetitive nature of the movements of prices is attributed to the psychology of the participants of the market.This is based on the notion that these participants frequently react in the same manner to recurring events in the market. In fact, a lot of popular chart patterns are even based on this assumption that history repeats itself.
Although technical analysis has proven to be of great help when it comes toforex trading, some forex traders still believe that fundamental analysisis the better way to analyze the market. Unlike technical analysis, fundamental analysis involves looking at macroeconomic factors that may affect the economy of a country, as well as its currency.
There has always been a debate about which is the more useful method of analysis, but even the best forex broker would say that it would be ideal if both methods are implemented. These two have their own strengths and weaknesses, hence,being well-versed in both types of analyses is the safe way to go.