What is technical analysis?
Technical analysis is the study of historical price action to forecast future price trends through the use of charts. Market action includes: price, volume and open interest.
Technical analysis can be used for short-term, medium-term and long-term trading. Technical analysts use various theories, charting tools, and indicators to develop trading rules and trading systems. Once technical analysis is mastered, it can be applied to all trading instruments and timeframes, whether for short, medium, or long- term trading. The three main principles of technical analysis are:
- The market discounts everything: The price of a currency pair automatically considers “fundamentals” like macroeconomic conditions.
- Price moves in trends: Technical analysis acknowledges that market movements can be summarised as trending in certain directions.
- History repeats itself: certain patterns tend to be repeated through time.
Technical analysis can also be divided into two categories. The first is charting analysis which uses tools such as bar charts, candle charts, trend lines, channels, support and resistance levels, chart patterns and gaps. Basically, charting analysis involves analysing information directly provided by price action.
The second approach is mechanical analysis which utilises moving averages, oscillators, envelopes and bands and various other technical indicators to interpret price action. Technical analysis compliments charting analysis with the latter being the basis.
