Following part 1, today, we will learn about a school of market analysis that is used by most traders. That is “Technical analysis”.
What is technical analysis?
Technical analysis is the study of price movements in a market. Accordingly, traders use historical patterns and charts to predict future price trends. It is a visual representation of the market’s performance in the past and at the present. In simple terms, traders use this information in the form of price action, indicators, and patterns to predict and inform future trends before entering a trade.
This is a very popular approach for all traders, thanks in part to the advancement in charts and trading platforms. However, for someone who is new to the Forex market, understanding indicators or charts and how to use them effectively and accurately is not easy.
Learn about technical analysis
Technical analysis involves the interpretation of patterns from the chart. Traders use historical data, mainly based on price, volume. They use this information to identify trading opportunities based on popular patterns in the market.
Different indicators are applied to the charts in order to determine the proper entry and exit points. This is to maximize the trading potential with a good return to risk ratio.
Reasons for using this analysis tool in Forex
Most traders prefer the use of technical analysis in trading. This is because all market information is reflected in the chart. The way the market moves is often repetitive.
Traders often use charts to look for what has been reflected in the past. Based on that, you can improve the probability of winning for each of your trading orders.
Use charts for analysis
Charts are the key to technical analysis. This is because the most important metric of previous markets and current performance is the price. This is the starting point when diving into a transaction’s potential analysis. Price action can be represented on the chart as this is the clearest indication of how the price is doing.
Charts help to identify the general trend whether the market is trending up or down, long-term or short-term, or to define sideways conditions. The most common types of charts are line charts, bar charts, and candlestick charts.
Candlestick analysis is especially useful as patterns and their internal relationships can assist in making predictions about the future direction of prices. Once a trader has mastered the basics of charts, he or she can use indicators to aid in trend identification.
- Notes: Technical analysis is highly subjective. That means for the same chart, each person may have his own perspective.
Schools of technical analysis
There are 2 main schools of technical analysis in the market. They are: Using indicators and Using no indicator.
- Using no indicator: traders only use plain charts without any supportive indicators. They analyze the chart based on price behavior.
- Using indicators: there are many different types of indicators such as MACD, RSI, MA, EMA, etc. Each trader will choose his own suitable indicators. From there, they will build the most effective trading system.
- It can be applied to any market using any timeframe.
- Technical analysis can be used as an independent method.
- It allows traders to identify trends in the market.
Technical analysis is an extremely useful method of trading. However, you need to be patient and serious to practice before it can be effective. There is absolutely no “holy grail” in the Forex market.