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Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.
In its purest form, technical analysis considers only the actual price behavior of the market or instrument, based on the premise that price reflects all relevant factors before an investor becomes aware of them through other channels. Technical analysis is widely used among traders and financial professionals, and some studies say its use is more widespread than is "fundamental" analysis in the foreign exchange market.
Also, Pure technical analysis holds that prices already reflect all such influences before investors are aware of them, hence the study of price action alone. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions. Essentially, technical analysis examines two areas of investing: the analysis of market "sentiment" and the analysis of "supply/demand".
Technicians seek to forecast price movements such that large gains from successful trades exceed more numerous but smaller losing trades, producing positive returns in the long run through proper risk control and money management.
Prices move in trends
Technical analysts believe that prices move in trends. Technicians say that markets move in a trend up, down or sideways (flat). This basic definition of price trends is the one put forward by Dow Theory.
History tends to repeat itself
Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. "If this currency pair (GBP/USD) ever gets to 1.9500 again, I will buy it," "the European Central Bank will raise interest rates due to high inflation in its April meeting, so I will buy EUR/USD" these are all examples of investor sentiment repeating itself. To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior does repeat itself so often, technicians believe that recognizable (and predictable) price patterns will develop on a chart.
Technical Indicators
Beside technical patterns and other theories, traders often prefer to use technical indicators to analyze the market. In fact a technical indicator is a result of mathematical calculations based on indications of price or volume or both. The values obtained are used to forecast probable price changes.
There are many technical indicators already developed and today, some of these indicators such as Moving Averages, Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) and many other are very popular indicators in FX trading.
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