Home Commodities and CurrencyForex Forex Technical Analysis

Forex Technical Analysis

By: EconomyWatch Date: 23 July 2009

The core Content Team our economy, industry, investing and personal finance reference articles.

EconomyWatch, Content Team

Forex technical analysis entails the study of historical market data related to price and volume movements of a currency pair. The study is done with the purpose of forecasting price movements. Technical analysisdoes not, however, help traders make absolute predictions. It simply enables traders to project the likely price movement of a currency pair over a period of time. This analysis is used by day traders and short-term investors to conduct trade in the forex market.

How Does Forex Technical Analysis Work?

The foundation of forex technical analysis is based on two premises:

Price of a currency discounts every aspect and information related to the market.
Price movements are never completely arbitrary and follow a trend. A technical analyst believes that it is possible to identify an ongoing trend and conduct trade based on the trend. The trader then hopes to generate healthy profits as the trend unfolds.

The methods used in technical analysis are:

Moving averages: With this method, traders can identify various short- and long-term support and resistance levels for a currency. The most commonly used moving averages are the 30-day moving average (DMAs) and 200-day moving average (DMAs).
Charts and patterns: In this method, extensive charts are made on the basis of historical price movement data. These charts are used to identify patterns and shapes, such as double top, double bottom, triple bottom and head and shoulders.

Forex technical analysis can help to:
Identify a trend. This allows investors to make predictions on future trends.
Judge the direction of the current trend. This helps investors gauge the best time to enter a trade or exit from a position in the forex market.
Minimize risk exposure. A trader can manage risks with technical analysis. This method should be used in tandem with fundamental analysis, while staying abreast of news related to a country’s economic and political environment.