Forex Walkthrough


Level 4 Charts - Technical Analysis

Now that you know most of the fundamentals and basic aspects of forex, in this section we'll introduce you to some charting patterns and a method of analysis within a field called technical analysis. Technical analysis is a method for evaluating currency movements by analyzing the data generated by market activity; this data is often historical data such as past prices and volume. Technical analysts will attempt to analyze this data in order to identify patterns that can help them predict future (short-term or long-term) price movements in the currency.

There are several different techniques technical traders use to analyze data. In this section of the tutorial, we'll introduce you to moving averages, trends, resistance and supports, double tops and double bottoms, Bollinger Bands® and the popular MACD.

But first, let's look at three reasons why many traders believe technical analysis can be a good way to analyze currency movements. Technical analysis is based on three underlying assumptions about the market and prices.

1. Technical analysis is based on the assumption that the market discounts everything.

This means the price of the currency reflects all available information, including fundamental factors (i.e. economic news) and thus doing fundamental analysis, some argue, would add no value. Instead, technical analysts believe the analysis of price movement or the supply and demand of currencies is the best way to identify trends in the currency.

2. Technical analysis is based on the notion that price movements tend to follow a trend.

This means past price behavior is likely to be repeated, and if a trend has been established the currency will most likely continue in that same direction.

3. In connection with the belief that prices move in trends, technical analysis assumes that history tends to repeat itself.

The assumed repetitive nature of price movements is attributed to the psychology of the market participants. Generally, this is based on the idea that market participants have, historically speaking, often reacted in a similar fashion to reoccurring market events. Many well-known chart patterns are based on the assumption that history tends to repeat itself.

With that said, there are also many traders who believe fundamental analysis - looking at macroeconomic factors that affect the economy and thus the currency - is a good way to analyze currencies. There has always been the debate between which is the better method, but it would likely be best for you as a trader to be well-versed in both methods of analysis. Both have their strengths and weaknesses. (For a primer on fundamental analysis' role in forex trading, refer to our article Fundamental Analysis for Traders.)

Not Just for Currencies
Technical analysis can be used on any security with historical trading data. This includes stocks, futures and commodities, fixed-income securities, etc. In this tutorial, we'll use technical analysis examples to analyze currencies, but keep in mind that these concepts can be applied to a variety of securities.

Now that you understand the philosophy behind technical analysis, we'll get into the more common tools of technical analysis and build towards more advanced analysis techniques in the next few sections.

Moving Averages
Related Articles
  1. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  2. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  3. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  4. Chart Advisor

    4 European Stocks to Consider Buying

    European companies, listed on US exchanges, that are providing buying opportunities right now.
  5. Stock Analysis

    3 Solar Stocks to Add to Your Portfolio

    Understand the growth and challenges of the renewable energy market and its success in 2015. Learn about the top three energy stocks to add to a portfolio.
  6. Professionals

    How to Sell Mutual Funds to Your Clients

    Learn about the various talking points you should cover when discussing mutual funds with clients and how explaining their benefits can help you close the sale.
  7. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  8. Chart Advisor

    ChartAdvisor for October 2 2015

    Weekly technical summary of the major U.S. indexes.
  9. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  10. Investing Basics

    Statistical Proof That Buy-and-Hold Investing Pays Off

    Learn about how the data suggests that the buy-and-hold investment strategy still works, even after the huge declines of the Great Recession.
  1. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based ...
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  4. Liquidity

    The degree to which an asset or security can be quickly bought ...
  5. Derivative

    A security with a price that is dependent upon or derived from ...
  6. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  1. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  2. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  3. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  4. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  5. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  6. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!