Technical analysis plays an important role in helping you to predict the future price movements in the market. It is based on the premise that the historical price action of an asset can be used in order to predict the future price action of that asset. Since the Forex market has a large volume of transactions occurring over a period of 24 hours, using technical analysis is an ideal tool to use in order to understand the market movements.
In technical analysis, price action is depicted visually on a trading chart. Traders can use various tools in order to help them predict the future price movements of the asset. This includes identifying trends, support and resistance as well as many other mathematically derived indicators such as the RSI (Relative Strength Index) indicator. There are a wide variety of tools that one can use for technical analysis to assists your trading decisions in the Forex as well as other financial markets.
One of the key characteristics of the financial markets is that price trends often repeat themselves. Since there are a large number of traders in the Forex market including banks, insurance companies, hedge funds and private investors, there is very rarely a situation where inconsistencies can be exploited in the currency markets. Any disconnects or movements that go against the market trend are generally corrected within seconds or less.
Technical analysts, therefore, enjoy Forex trading since all the known information is already included in the Forex exchange rates. With so few discrepancies in the Forex market, technical analysts can focus on the trend of the market as well as the flow of capital.
Technical indicators are the tools that helps the traders analyze the market and to predict the future price movements of assets. Today, there are hundreds of indicators that one can use in order to determine the future direction of currency exchange rates.
In technical analysis, a trader needs to determine if a currency pair is in a trend. That is, is the currency pair consistently moving in one direction, either up or down, or is it moving horizontally or sideways. In order to determine the trend of a currency, you can draw trend lines that connect important historical price points on a trading chart. These points play a vital role as they clearly show where the price has been unable to move either higher, which is referred to as resistance, or lower which is referred to as support. With the support and resistance points, you are able to determine when a trend is beginning, when it could continue and when it may be ending.
In Forex trading, the major currency pairs such as the USD/JPY and the EUR/USD, have shown historically that they have the greatest tendency to trend. Meanwhile, some minor currencies have often shown a range or a horizontal trend. The benefit of having this information enables traders to take advantage of the trends of a currency pair and to trade accordingly.