$50
3 pips
$50
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In any introduction to technical analysis, perhaps the first thing a forex trader needs to understand is that fundamental information like economic data and interest rate differentials become rapidly priced or “discounted” into the exchange rate once they are commonly available to market-makers. The saying that technical traders often use to encapsulate this concept is: “Price discounts all.”
The art and science of technical analysis assumes the truth of this idea, in addition to making the observation that human behavior in crowds tends to repeat itself. Such behavior shows up visually in the forex rate action observed over time as market psychology fluctuates between periods of optimism or bullishness and pessimism or bearishness.
As a result of the foregoing assumptions, the trader basing their decisions on technical analysis can ignore all of the otherwise distracting market information. Instead, they can focus their attention on using the exchange rate and its past behavior to forecast its future direction, often with impressively accurate results.
Some of the more popular technical analysis techniques and a brief description follow:
- Chart Patterns
Another advantage of technical analysis arises from the fact that many so-called chart patterns provide specific “measuring objectives” in terms of price and even sometimes with respect to time when a particular trigger level is broken. As a result, once they identify a reliable chart pattern, the technical forex trader can operate in the markets with a considerably greater degree of objectivity.
In general, chart patterns tend to fall into the basic categories of continuation, reversal or consolidation patterns, depending on how the subsequent forex rate action usually proceeds once the pattern completes itself.
- Trends and Channels
Trends form an especially important class of continuation chart pattern. Technical analysts generally identify an up trend by a series of higher highs and higher lows, and a down trend by a set of lower lows and highs. Furthermore, sets of parallel lines can sometimes be drawn through the identifying high and low reversal points to form a channel.
Once the exchange rate breaks an established channel in a direction contrary to the initial trend, that event signals the end of the trend. It also sets up a rate objective equal to the width of the channel projected from the point of penetration.
- Support and Resistance
By looking at a chart of exchange rate movements over time, a technical analyst can identify places where buying interest overcame selling interest to prompt a bullish reversal in rate action, or where selling interest surpassed buying interest to prompt a bearish reversal. These levels would be known as support and resistance levels respectively, because buying interest supports the rate, while selling interest generally provides resistance to a move higher.
- Technical Indicators
Another major area of technical analysis involves using one or more of the wide variety of technical indicators available to analyze exchange rate or volume data with numerically. Such indicators usually provide clear trading signals that traders often incorporate into their trader plans.
An example of one of the more popular indicators is the Relative Strength Index. The RSI gives insight into whether the market is oversold or overbought and hence due for a consolidation or reversal.
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