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Technical analysis is a powerful method of utilizing historical price data for the prediction of future price behavior and it has a variety of technical indicators in its arsenal.
Forex traders’ biggest challenge is what to trade next and technical and fundamental analyses are the two main methods used to forecast a currency pair’s price move. Even though they differ vastly in terms of methodology, they both have the same objective and could prove useful in predicting future price behavior. Fundamental analysis concentrates on elements that cause price action but technical analysis is more focused on the effects on price action.
Technical analysis in the forex markets utilizes historical data and past market action of financial instruments for the prediction of upcoming price movements and trends. Technical analysts are very reliant on price charts as they provide the easiest method to visualize historical data. This method relies on the basis that the current market price of a financial instrument is a reflection of everything that affects it, such as supply and demand, geopolitical factors, and the economy’s state of health in the case of a currency. Another principle of technical analysis is that prices create patterns, and once these patterns are identified there is a probability that they will move in a specific direction. Many types of patterns which were repeated over time have been recorded during the last century, and they provide evidence that future ones may behave in a similar way.
Predicting the future state and direction of forex markets by using technical analysis is helped by a variety of indicators. These are measurements calculated from historical price data of a currency pair and they are estimators of upcoming price level or at least the upcoming price direction. Some popular technical indicators are the Moving Averages (MA), Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), and Bollinger Bands. All of these indicators are really easy to use by technical analysts of any experience level because they are included in all top trading platforms such as the MT4, and they automatically perform the calculations needed.
The prices of forex instruments are liquid and sometimes change because of volatility, but a single drop in price is not a confirmation of a downtrend and a rise is not strictly the beginning of an uptrend. The MA acts as a trend following indicator and even though it will not predict future market direction, it will help to confirm a trend once it has begun. The MACD is also a famous trend following indicator, which may be able to confirm a trend and it also may predict a change in trend direction.
Other indicators, like the RSI, are momentum signals and they give information on overbought and oversold conditions of a currency pair. By having this type of information, the trader may be able to predict whether the currency will change trend direction. In a similar way, Bollinger Bands take on another method to signal trend reversals of currency prices and hence provide buy or sell tips.
The descriptions of the above mentioned technical indicators are merely an introduction, and a proper study of the properties and methodology of each one of them should be undertaken by prospective technical analysts who want to find more on how these tools can be utilized to take advantage of the power of historical price data.