3 Principles of Forex Technical Analysis


Forex (also known as currency exchange or for example) technical analysis, which is a widely used method in currency trading around the world, is based on three essential principles. The first principle is that the fx action slows everything down. The actual market price is a reflection of everything that is known to the market that may have an impact on the price movement. The pure technical analyst is only concerned with price movements and not the reasons for changes.

Second, prices are moving in trends. The price can move in 3 directions, ie. they can move up, down or sideways. When a trend in any of these directions is in effect, it will usually continue and create a trend. Technical analysis is also used to identify patterns of market behavior that have long been recognized as important. These patterns usually behave in the same way as in the past, as long as you can recognize and find out what they are. They have been shown to be consistent in predicting future traits. If you are able to correctly identify the card patterns and what is the next price movement, you would be able to limit your losses and maximize your profits.

And third, the story repeats itself. Technical analysts believe that investors collectively repeat the patterns of their investment behavior. They tend to act and respond in the same way to different types of stimulus, such as financial data or other news. As investor behavior repeats itself so often, it is possible to map recognizable market patterns for analysis.

Therefore, a trader who is a pure technical analyst will not be concerned about market news. He would use the card patterns as the market has taken the news into account and acted accordingly. Although widespread, however, there are some drawbacks to this trade methodology.