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Introduction to Technical Analysis -
1
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.
Basic Principles
Technical analysis is based on three assumptions:
1 – Price movements are a result of all market forces combined.
Things that can affect currency prices include political
events, economic conditions, supply and demand, seasonal
variations and weather conditions. The technical analyst,
however, is not concerned with the reasons for market movement,
but rather, the movements themselves.
2 – Currency prices follow trends. Many market patterns have
been recognized as having predictable consequences.
3 – Price movements follow historical trends. FOREX data has
been collected for over 100 years and patterns have emerged
over time. These patterns are based on human psychology and the
way people react to certain sets of circumstances.
Is Technical Analysis Necessary?
Most FOREX day traders rely heavily on technical analysis and
may use fundamental analysis to support their trading strategy.
A major advantage of technical over fundamental analysis is
that it can be applied to many different markets and currencies
at the same time. Fundamental analysis requires in-depth
knowledge of the political and economic conditions of a certain
country; therefore it is less likely that any one trader can do
proper fundamental analyses on more than a few
countries.
The beginner trader may be put off by the seeming complexity of
technical analysis and wonder if it is necessary for FOREX
trading. As with any investment, FOREX trading requires a
strategy. Although any strategy is possible, technical analysis
is a proven method for predicting movements in the FOREX. Does
that mean it's a sure thing? Nothing is 100% certain, and
currency prices are affected by a variety of forces. This is
why many traders use a combination of technical and fundamental
analysis to plot their trading strategies.
Availability
Every FOREX online broker should provide access to a wide
variety of charts for technical analysis. Some charting
software is available free of charge while in-depth
professional charts may carry a monthly fee. Charts can be
viewed by various time scales and provide detailed information
about price movements as well analytical overlays. Charts can
be zoomed in to the tick level or zoomed out to see the broad
picture over a period of months or years. Charts are updated in
real time.
FOREX charts may be available on your broker's web site or may
be included as part of their trading software.
Before beginning in FOREX trading it is a good idea to become
accustomed to market behavior by following charts for a period
of time and studying their movements and learning about trends.
Many brokers provide practice accounts that can be used by
beginners to place 'paper' bids – no real money is exchanged.
These practice accounts familiarize the beginning trader with
FOREX charts and market movement while at the same time
allowing him to become acquainted with the trading software a
particular broker uses.
Part 2 of this article will look at the various kinds of charts
and technical indicators.
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