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What is Technical Analysis?


When you use technical analysis, your aim is to predict market trends and changes in currency rates by using currency rate data from the past. This means that Technical Analysis is a “micro” or precise and detailed approach, in contrast to the “macro” or overall approach used in Fundamental Analysis.


What are the main assumptions of Technical Analysis?


There are three major assumptions:


  • We want to know what happened in the past, but we don’t attach any importance to the reasons that might explain why those things happened

  • There are trends and patterns that govern the way that currency rates change, and it is possible to identify those patterns in advance to then predict the future

  • Both patterns and history repeat themselves; it’s a matter of identifying the start and the end point, and therefore the time interval over which this happens.


Why doesn’t everybody just use Technical Analysis?


Technical analysis although it is precise is not necessarily accurate or timely. The tools available may only indicate a trend well after it has started and too late to make reasonable profit. They are also insufficient for taking into account all the random events in the world that can still affect currency rates. Think of technical analysis like the weather forecast. It’s often very helpful, but it’s never infallible.


What kinds of technical indicators are there?


Categorizing technical indicators depends on the different ways of applying them. Are you looking for an indicator to give you advance (but uncertain) warning of changes in currency rates? One to tell you when to open a position (start a trade)? Or when to close a position (stop a trade)? Here’s a possible classification. You’ll find examples in the pages that follow.


  • Strength indicators (how strong a trend is, how likely it is to continue)

  • Support/resistance indicators (where the current maximum/minimum rates are)

  • Oscillators and Momentum indicators (advance/uncertain and more certain/delayed)

  • Volatility indicators (how much currency rates jump around)

  • Cyclical indicators (repetitive patterns and even patterns within patterns)