One of the underlying tenets of technical analysis is that historical price action predicts future price action. Since the forex is a 24-hour market, there tends to be a large amount of data that can be used to gauge future price activity, thereby increasing the statistical significance of the forecast. This makes it the perfect market for traders that use technical tools, such as trends, charts and indicators.
Technical analysis is the study of the price movement on a chart of a particular Forex currency pair or other market. We can think of technical analysis or “T.A.” for short, as a sort of framework that traders use to study and make use of the price movement of a market.
The primary reason that traders use T.A. is to make predictions about future price movement based on past price movement.
Technical analysis is the framework in which forex traders study price movement.
The theory is that a person can look at historical price movements and determine the current trading conditions and potential price movement.
The main evidence for using technical analysis is that, theoretically, all current market information is reflected in price.
If price reflects all the information that is out there, then price action is all one would really need to make a trade.
The important thing is that you understand the concepts under technical analysis so you won’t get nosebleeds whenever somebody starts talking about Fibonacci, Bollinger bands, or pivot points.
Now we know you’re thinking to yourself, “Geez, these guys are smart. They use crazy words like ‘Fibonacci’ and ‘Bollinger’. I can never learn this stuff!”
Technical analysts look for patterns on the chart that tend to repeat themselves; they do this to develop their trading edge from. The underlying logic here is that since most price movement is driven by human beings, certain patterns will repeat themselves in the market as human beings tend to be repetitive in their emotion and interaction with the market.