Forex Technical Studies: The Analyst’s Essential

There are charts, prices, bids and asks, so how does one create a meaningful Forex strategy without being overawed by the confusion and chaos in the market? It is extremely difficult to make use of the huge amounts of raw data that is on offer, so technical analysis tools were developed to solve this problem. One such tool that was developed in the early 1900’s was The Dow Theory. Like many of the technical analysis tools that exist today it was one of the first aimed at solving the data abundance problem by putting it into mathematical patterns that were carefully defined by scrutinising a price’s action. As was to be expected, in the following decades traders and analysts devised their own methods, indicators and strategies for making sense of the data.

Technical analysis is built on the principle that the market makes all the information about price trends available to the public. Which can be interpreted as, since the price quotes are created by the collective actions of millions of active traders, each of whom have money at stake and have the purpose of making money, then their combined observations must naturally make the best interpretations of the data available. And since, according to the fundamental beliefs of technical analysis, traders are always immediately aware of the latest news releases, the price action is a direct result of the incorporation of this news into their trading decisions. Making trying to evaluate the news and statistics independently and the affect it will have on price action a futile endeavour. Technical analysis tries to prove that price action is not random by drawing our attention to periods where the price showed obvious directionality and therefore proving that there is merit in studying trends and consequently the trending nature of the market can be analysed by technical tools and methods.

So what are those tools and methods? We may already be familiar with indicators like RSI (Relative Strength Index), the MACD (Moving Average Convergence/Divergence) and trend lines, which are created to generate trade signals telling us whether to buy or sell an asset. As we already know, indicators do more than just tell us whether a price is too high or too low, they determine the values which can be best exploited for profit. Similarly, traders look for certain shapes in the price action to symbolise possible technical configuration. For instance, a triangle will signify that the present trend is expected to continue, while a head and shoulders pattern means a reversal. Overall, the purpose of all the many indicators is to make sense of the data into tradable signals.

In essence, technical analysis is built on an analysis of probability. In other words, technical tools don’t provide specific outcomes; they merely alert us to scenarios where profit can be made if things develop as expected. In any case, technical analysis is still a very useful and proven method because there is no denying that there is much that can be learnt from studying the past.

Related posts:

1. Scope and Advantages: Forex Technical Analysis
2. The Forex Market Trade: The Pitfalls of Indicators
3. Understanding the Difference between Oscillators and Momentum Indicators