What is ‘technical analysis‘?
Technical analysis involves studying past market data, primarily price and volume, to forecast future price movements. Traders use various tools and techniques such as chart patterns, indicators, and oscillators to identify trends and make informed trading decisions.
The primary assumption is that historical price movements tend to repeat themselves, allowing traders to anticipate potential price direction.
By analyzing charts and patterns, traders aim to determine entry and exit points for their trades. Technical analysis does not consider the fundamental factors of an economy but focuses solely on the price action and market psychology.
Example of technical analysis in forex
An example of technical analysis in forex trading is the use of moving averages. Traders use moving averages to identify trends and potential entry and exit points for their trades.
For instance, a trader may use a combination of a short-term moving average (e.g., 20-day) and a long-term moving average (e.g., 50-day) to identify a “golden cross” or a “death cross” – when the short-term moving average crosses above or below the long-term moving average, signaling a potential change in trend.
This can help traders make informed decisions about when to buy or sell a currency pair.