Forex Technical Analysis


  Pricing of currencies is all based on supply and demand. A huge number of factors come into play here, including; hedging, speculation and the need to hold/convert currency (this can be for tourism, government transactions, business transactions, among others.

There is no exacting way to determine what the true price of a currency should be, nor what the future holds for prices, however there are tools that traders can use which give them a good indication as to future price movements. These tools fall into two broad areas: fundamental analysis and technical analysis.
Fundamental analysis attempts to determine price by taking into account economic and political forces that affect supply and demand.
Technical analysis is the use of past price movements to determine the future direction of prices.
I will go into detail on fundamental analysis methods in a future article, this article will discuss technical analysis in more depth as it is far more accessible and easy to apply for the average trader. Despite this, I’ve always been of the opinion that a good strategy should take both fundamental and technical analysis into account. For example, if you have formed an opinion that the broad macroeconomic factors (fundamental analysis) lend themselves to the British Pound strengthening against the US Dollar, when determining trades based on technical analysis, only take the long trades on the Pound and ignore the shorts.

The Core of Technical Analysis

As mentioned above, technical analysts are concerned with past pricing action and thus use charting as their main tool.
One of the underlying assumptions of technical analysis is that history tends to repeat itself. Personally, after a considerable amount of time spent studying technical analysis, I certainly believe this to be true. The same goes in the equities market, bond market, etc, etc. The main reason why this is the case is that economic cycles tend to be relatively consistent as the whole system is driven by human emotion and consumption. So long as humans continue to partake in the economy and trading, there will always be repeatable price action.
Through use of charts, trends can be determined, volume of trading can be analysed, strength of movements can be interpreted, etc. The primary way technical analysis is used is to detect trends. The biggest gains and generally most profitable trades are those where a trend is detected early and acted upon.
Supplementing this are other indicators such as Moving averages, oscillators, and Bollinger Bands. These all give an indication of momentum and can be used either as supporting information, or as entry triggers themselves. Future articles will explain exactly how technical analysis can be used to find trades and what exactly all the charts and indicators mean.

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