Technical analysis is perhaps one of the broadest topics falling under the FX umbrella. Technical analysis aims to aggregate and analyse demand and supply factors in the markets to identify trend strength and direction. This analysis is carried out all but entirely via charts – this is why many technical analysts are also known as chartists within the FX trading world.
With this blurb, we look to pick at the very foundations of FX technical analysis, and why it is crucial for your FX trading success.
The Basics Of Technical Analysis In FX Trading
Technical Analysis Indicators. Much of technical analysis revolves around the use of suitable FX trading indicators. These indicators aim to slice and dice market behaviour by displaying various types of price information. In this way, indicators can help determine whether a market is trending or ranging, and how strong that trend might be – whether the FX currency pair is overbought, oversold…and quite a bit more. Indicators normally can be most effective within FX trading when combined with each other, and with other technical analysis strategies such as trading chart patterns.
Common Technical Analysis Assumptions. There are several assumptions that technical analysts must make as they plot and potter with their charts. First, is the assumption that the FX markets discount absolutely everything. All things from market psychology to economic factors are already priced into the FX charts, so technical analysts must use the existing price structure and propensity to pick the moves that price will make next. The next assumption is that price action tends to form trends – positive or negative, the job of the FX chartist is to identify and trade the prevailing trend. The final technical analysis assumption is that chart patterns tend to recur again and again. An uninitiated person may see the charts as random squiggles and lines, but the accomplished trader knows only too well that the same cache of patterns will sketch out over and over again on the charts. Identifying and trading these patterns can help the FX chartist make more money.
Support And Resistance Levels Are Key In Technical Analysis. There are fewer more reliable notions within the world of FX trading than support and resistance levels. One of the most ground breaking things that a new chartist will learn is in identifying and constructing support and resistance levels. These can be highly powerful when combined with additional trading knowledge. A support level is a floor below which price has not plunged below in the recent past. Conversely, a resistance level is ceiling where price has struggled to pierce up past. When a chartist is able to identify support and resistance regions, they are able to pin point price levels where the price has a high probability of reversing. This is incredibly powerful information, since if the support or resistance level holds, a trader can open a position accordingly. In the event that a support or resistance level is breached, the “breakthrough” can be equally powerful to trade. Breakthroughs are often full of energy, and there can be many pips up for grabs when these are traded with guile and cunning. It’s also worth noting that when a resistance area sees price break up over it, it flips and becomes a support area. Similarly, when a support area is broken, it flips roles to become a new resistance area. Often following a genuine breakthrough, price will return to the old support/resistance area to test it before continuing in the breakthrough direction.