Technical analysis is the study of charts and indicators to determine the past and future price movement of a currency pair. Unlike fundamental analysis , technical analysis relies on the use of charts and mathematical techniques to examine various aspects of a currency pairs price movement. With the growth of the Internet, technical indicators that were once available only to brokers and professional traders are now available to any trader with a computer.
What Do Charts Tell Me?
Charts can provide a lot of information about the price movement of a currency pair. Many traders say that a chart tells a story about the currency pair. With more than 50 types of technical indicators , a trader can receive a wealth of information about how a currency pair is moving. From this historical information, the trader can deduce the future movement of a currency pair.
Support and Resistance
Most traders are looking for support and resistance lines to tell them where and how the currency price is likely to move. A support line lies below the currency pair price. A resistance line lies above the currency pair price. Depending on the strength of these lines, prices tend to trade between the support and resistance levels, bouncing off one and heading towards the other. Support and resistance lines are basic types of trend lines that can be determined by the moving average lines or by more complex technical methods.
Many traders will also be looking for a trend line. A trend line shows how a currency pair price is moving (or trending) up, down, or sideways. Finding a trend can be very helpful in determining future price movement. The saying that the trend is your friend is quite true and many traders rely on the existence of a trend to predict price movements.
A technical indicator studies a particular aspect of a currency pair. Technical indicators are very similar to economic reports in that they study the health and movement of a currency pair while economic reports study the health and growth of an economy. Some technical indicators are basic such as the moving average line . Other indicators are complex calculations like Bollinger Bands or the MACD .
Number of Indicators
Traders can use many different kinds of indicators or they can focus on a few. Most experienced traders will focus their efforts on using only a few types of technical indicators to provide them with the information needed to trade.
Why Use Technical Analysis?
Technical analysis provides information on the best entry and exit points for a trade. On a chart, the trader can see where momentum is rising, a trend is forming, a price is dipping or other events are developing that show the best entry point and time for the most profitable trade. With the constant movement of various currencies against each other in the Forex market, most traders will focus on using technical indicators to find and place their trades.
Is Technical Analysis Difficult?
Technical analysis is not difficult, but it requires studying different types of charts such as the hourly or daily charts, knowing which technical indicators to use and how to use them. Computers and the Internet have made this process much easier. Most brokers provide basic charts and technical indicators for free or at a very low cost. One way to avoid getting frustrated by all the lines, colors, and graphics is to focus on using only a few indicators that will provide you with the information needed. Try not to clutter your chart with too much information.
Remember that the chart is telling a story.