A Quick Introduction to Technical Analysis

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If you wish to gain an upper hand in the forex market, then you need to be able to predict how prices and trends will move. Knowing the direction that the market would take would then help you decide accordingly on what action you need to take.

One of the ways you can do this is by technical analysis. This method uses past data to help traders predict movements in the market, and is based on the Dow Theory from Charles H. Dow's editorials on the Wall Street Journal.

Because of its vast application, technical analysis is used not only in forex trading but also in other areas such as interest rates, bonds, and commodities. 

There are three general principles of technical analysis. They are as follows:

1. Market action discounts all. This simply means that the price already reflects external factors that could affect it, including political and economic factors. Thus, knowing exactly what is happen in the market is not obligatory. Rather, you could simply look at the price of the currency and you will know immediately the decision you need to make.

2. Prices move in trends. There are three general directions that a trend would move: down, up, or sideways/flat. Knowing the trend of the price in the short or long term will help you know the direction the market is taking, which again can help you make buying or selling decisions.

3. History repeats itself. This indicates that human behavior changes little over time. Thus, the decisions traders made in the past will likely happen again in the future. Now all a technical analyst should do is look at a chart and try to recognize price patterns as they develop. Of course, it also helps to get a feel of the pulse of investors by referring to surveys. These surveys could provide traders with clues on whether or not a current trend will continue or a reversal would develop.

Technical analysis is a good introduction to forecasting instruments among novice traders, and can be a solid tool for experienced ones. For more tips, be sure to check out regularly our Technical Analysis Tips section.

By FX Strategy Team, Published on 26th of March 2013
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