Currency trading is the most popular form of investment in the world. To predict the price behavior of any currency, Forex technical analysis is used by studying currency rate charts.
Unlike stocks, which are priced based on many factors, including corporate income statements, balance sheets, debt metrics, and other underlying criteria, currency trading is largely based on simple price action.
Traders make decisions based on patterns formed on price charts and the consequences of price trends. The process by which the price chart is understood is called Forex technical analysis. Technical analysis tools are used to predict the future movement of currency prices.
The most basic component of price action is the "trend". Trend analysis was first discovered nearly a century ago by Charles Doe. His theory defines the trend as a sequence of "higher highs and higher lows." The new high price is followed by another new high, higher than before. Foreign exchange investments during any decline in an established trend have a high chance of success as long as the trend continues.
Dozens of well-known chart patterns offer good predictions of future price movements. A technical analyst remembers these patterns and learns to quickly identify them on any chart.
Charts are very important for understanding technical analysis, many traders also rely on indicators that are added to the price chart. These tools use formulas to analyze price action and offer intelligent information.
Moving average is one of the popular indicators used in technical analysis. It looks like a line overlaid on a price chart. The line shows changes in average price, which can help simplify especially volatile charts.
Novice traders often regard Forex technical analysis as the “Holy Grail” of trading. There are no technical analysis tools that are 100 percent accurate and therefore currency trading remains risky for all participants.
