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Forex technical analysis tries to predict price movements of currency by examining the market variables and mathematical data. This includes market participants (on the national and corporate levels), price histories, fluctuations and other trends. The forex technical analysis makes the assumption that economic trends are not randomized. Therefore, the mathematical formulas used to develop a technical analysis make the assumption that a price will move in any of three linear directions: up, down or sideways.
When a technical analysis shows that a price is trending upwards, there is an increase in the currency value and then an increase in the amount of buyers. When a price trends downwards there is the opposite impact: currency value decreases and there are more sellers. A sideways trend shows that there is little movement in the value—but that does not mean that there are no buyers or sellers of a particular currency. This is because, much like the stock market, trader perceptions create buy/sell patterns. Therefore, it is important to examine the current currency market trends, as well as the trader mentalities.
A forex technical analysis uses charting tools to graphically depict trends based on current and historical information. The technical analysis may involve, but is not dependent on, fundamental analysis characteristics, such as governance and employment of the currency's originating nation. The main benefit of technical analysis is that it is similar to your traditional stock market analysis---it shows value patterns, trends, rises, falls, and so on. In fact, many of the charting tools used in a technical analysis, such as the candles stick, is mimicry of tools used in the stock market. So while currency trading is a relatively new market for your average trader, the mathematics and chart processes are familiar.
If you have experience in stock trading or have taken courses in graphical analysis, you are already very familiar with forex chart analysis. They function in the same manner by showing historic trends and developing future predictions. The mathematics are different, so please be aware that forex chart analysis considers both fundamental (national politics, consumer faith, gross domestic product) and technical (price moves, buy/sells) information to create a forex chart.
Brokers use forex chart analysis to deliver information to traders and investors regarding price moves, trends, and histories. In general, brokers do the analyzing and thus make recommendations. However, the final buy/sell decision and profit/loss are at the sole responsibility of the investor or trader, so it is beneficial to understand the basics of forex chart analysis.
A basic forex chart analysis will examine the time and date, the current price, and trending price. Many also allow you to change the indicators, timeline (between minutes, hours, days) and the best forex chart analysis will plot real time forex data.
Forex currency charts are interpreted in the same manner you read traditional stock, value, price, or any other chart. There is little difference in the way one reads a forex currency chart to the way one reads any other chart. The main differences are that forex currency charts often have smaller time intervals and may be compromised of more technical or fundamental indicators.
In forex currency charts, there are historical forex charts and real time forex charts. Most broker companies will offer both types of charts. Historical forex charts should be read with the goal to interpret trends of currency pairs. Real time forex charts are charts that are constantly being updated based on the most current information available in currency pairs.
Forex currency charts are not a stretch from traditional charts, but they do require a fair amount of understanding of the technical and fundamental analysis that are used to create the charts and make predictions of future value.
Foreign exchange charts should include the chart period as a time interval, such as 30 minutes, 24 hours, five days. The foreign exchange charts should give the specific currency pair, such as GPB/USD.
The foreign exchange charts will exemplify strong or weak moves based on the value differentiations in the currency pairs. They will also show the relationship between the two monetary units of a currency pair. This is basically summed up as the price activity where the current value of the base currency pair is placed against the second currency pair. This allows an investor to see the changes in the value of the currency pair, and is often used to determine the bid/ask prices.
Many charts will also show moving averages as lines of different colors over a period of 10 or more days.
|Jennifer Mathes, Ph.D.|