Technical analysis has long been used in traditional markets like the stock market. Technical analysis methods rely on price history in order to predict the future. There are numerous methods used in the predicting, but the bottom line is that they always rely on price movements of the past. Technical analysis takes a few different forms and many methods of use.
One method of technical analysis is the use of technical indicators. A technical indicator is a graphical representation of the price action that is usually displayed along the bottom of the screen. One famous example is a technical indicator called MACD. You can see an example of the MACD in use in the first forex trade tutorial.
There are also other methods for using technical analysis. You can use trend lines, or measure support and resistance. Both methods rely on looking at the chart and reviewing recent history. Is the price following a pattern? Is it moving in a range? No matter what price is doing, it usually falls into one of those two categories. If the price is moving in a pattern and in one direction, you can use trend lines to analyze where the price should go. If the price seems to be bouncing back and forth in a range, you can use support and resistance lines to make note of where the price should change direction.
Technical analysis can be great, but like other trading methods, it isnât perfect. Trading decisions are always up to the discretion of the trader making them. There are some great technical tools and indicators that are widely available for use. With so many traders using similar tools, even having slightly different interpretations, technical analysis can become a self fulfilling prophecy. If many traders are seeing the same price area as a buying point, the price could bounce as everyone makes similar moves. The question always remains how lasting those moves will be and that is where personal discretion comes in.
How technical analysis applies can be different for each trader. Every trader has their own interpretation of where they see trends and support. They also have their own ideas on setting up their indicators. These differences are called having your own trading system. You can take 10 different traders and you will probably get 10 different systems that give different signals. These differences are what make a market work.
Technical analysis is very useful in forex trading. It makes up only one portion of what you need to know when trading, but it is a very important thing to learn. Understanding technical analysis will give the charts some meaning when you look at them and help you understand why certain price movements occurred.