Technical analysis is the study of the price movement on a chart of a particular Forex currency pair or other market. We can think of technical analysis or â€œT.A.â€ for short, as a sort of framework that traders use to study and make use of the price movement of a market.
The primary reason that traders use T.A. is to make predictions about future price movement based on past price movement.
Technical analysts believe that all current market variables are reflected via the price movement orÂ price actionÂ on a price chart. So, if we believe that all market variables are reflected via price movement, it only goes to reason that we donâ€™t really need much else to analyze and trade the markets besides price. I am a technical analyst and so are the members in my trading community, we prefer T.A. because we agree with the idea that all market variables are reflected via price action, so we see no reason to use other means to analyze or trade the market. Thatâ€™s not to say that having some knowledge of fundamentals and news events is a bad thing, but we just donâ€™t rely on them heavily (we discussedÂ Fundamental AnalysisÂ in Part 5).
Technical analysts look for patterns on the chart that tend to repeat themselves; they do this to develop their trading edge from. The underlying logic here is that since most price movement is driven by human beings, certain patterns will repeat themselves in the market as human beings tend to be repetitive in their emotion and interaction with the market.
Technical analysis also encompasses learning to analyze the market structure; find trends, support and resistance levels and generally learn to â€˜readâ€™ the ebbs and flows of a market. There is obviously discretion involved here and I will be the first person to tell you that T.A. is more of an art than a science. That said, it is something you will get more comfortable with and better at given time and practice. T.A. forms the back-bone of my core trading method of price action, which is simply a derivative or off-shoot of â€˜traditional T.A.â€, except with more clarity and more concise strategies that donâ€™t involve confusingÂ forex indicatorsÂ or things like Elliot Wave Theory that are far too messy and open to interpretation for me to believe they are worth trading or teaching.
Most traders instantly think of a price chart like the one above when someone mentions the word â€œtechnical analysisâ€. Price charts provide us with an amazing amount of useful data that paints a complete picture of a marketâ€™s historical and current supply and demand situation, as well as the price levels that the market participants have deemed the most important. As technical analysts we need to pay special attention to these price levels as price will tend to respect them again and again, indeed, much of myÂ price action trading courseÂ is built around learning to identify and trade price action setups from key levels in the market. Price charts are also a reflection of all market participantsâ€™ beliefs about the market and market variables, so by focusing your analysis and trading on a marketâ€™s price chart you can streamline your trading and at the same time analyze the end result of everything that contributes to the price movement of a market.