Technical analysis in forex trading to learn about the result of the pattern of price movements that have occurred to predict the direction of price movement further. Trader is proficient and always use technical analysis called chartist or technicalist. A chartist tend to ignore the reasons or causes of price movements, and just focus on the result of the recent movement. Trading charts and technical indicators are needed to assist analysis.
There are three principles underlying technical analysis in forex trading
1. All causes of price movements have been declared in the pattern of price movement itself
Factors influence the release of economic data, the changing political situation, market sentiment and also change the amount of supply and demand has been reflected by the pattern of price movement in trading chart. In predicting the direction of the market, a true chartist just focus on the current price movement patterns and changes in technical indicators, not on what will happen as a result of a specific news release.
2. The price always moves follow the trend with certain limits
One of the important objectives of technical analysis is to determine the direction of price movement trends to come, both in the short, medium and long term. There are 3 state of the direction of the trend, namely the direction of price movement that will tend to keep (trend continuation), the direction of movement which tends to be reverse direction (trend reversal) and the movement which tends to move back and forth within a certain price range (sideways or ranging).
Before applying certain technical indicators to determine the direction of the trend, chartist usually draw a line connecting the lowest prices or the highest prices, the so-called trend lines (trend lines). In addition to the trend of price movements will continue or reverse direction if it has been touched, or pass (penetrate) certain price limits called support and resistance levels. Likewise, if the price moves sideways, break of support or resistance level suggests the occurrence of a state trending.
To determine the limits of the price, chartist draw lines of support and resistance are believed to be the price levels that are consensus (consensus) of market participants. In addition to the levels of support and resistance, these boundaries also be a number or level of psychological round number that is often used as a reference for market participants.
3. History of the pattern of price movements will always repeat (History repeats itself)
Chartist believe that the pattern of price movements in the past will be repeated and could happen again today. The more often a pattern chart (chart pattern) occurs, the greater the probability of truth. The pattern of price movements could also be a bar candlestick formations with different variations.
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Theories underlying technical analysis in forex
In addition to trends, patterns and formations bar candlestick charts, technical analysis in forex is also based on:
- Mathematical theory, as expressed in the calculation of indicators such as moving averages or Oscillator
- The theory of numbers, such as the Fibonacci Retracement and Gann Numbers
- The theory of waves, like waves of Elliot (Elliot wave)
- Theory gap (high, low, open, close)
