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Forex Technical Analysis

Another method which Forex trader can adopt to help them forecast the fluctuation of currency prices is with technical analysis.

Unlike fundamental analysis that looks at macro economic factors to forecast price movement, Technical analysis depends on the analysis of market generated data to help traders forecast price fluctuations.

It also ignores the analysis of the macro economic factors and assumed that all these fundamentals are sound and are reflected in the actual market data.

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In short, Technical analysis is not bothered with the reasons for an economic crisis or political upheaval but rather is concerned with the degree of fluctuations that are cause by the macro economic factors.

Furthermore, Technical analysis also assumes that all currencies prices move in a specific manner in the respect that it has a trend that can be predicted. Thus, by looking back at historical data about these price movements, Technical analysts are able to discern patterns from the data.

The main reason for these patterns is due to human psychology. Human beings tend to react in a specific manner when a certain event has occurred.

Advantages over Fundamental Analysis

Technical analysis also has an advantage over fundamental analysis because it can be used over a wide range currency pairs or market sectors at the same time. Fundamental analysis on the other hand requires a comprehensive overview study of a country political and social economic environment before one can draw any conclusion about the market.

At times, traders can be overwhelmed by the shear volume of information that is required to be digested before they can arrive at any conclusions.

To help them analyze the market data, technical analysts uses a wide variety of technical charts to help them make their forecast. Some of these charts are provided free and are incorporated in the trading platform provided by the brokerage firm. More detailed charts are also available with third party providers for a monthly subscription.

The data in these charts are also updated in real time and can be perused over several different time scales and zoom levels.

One of the key tools used by technical analysts is the price chart.

These charts provide a visual representation of price fluctuations over a specified time which can range from a minute to over a few years depending on the technical analyst’s requirement.

The level of detail or information required will depend on the type of charts that is used by the technical analysts.

The information can be displayed on a simple line chart or on a bar chart or candlestick charts that shows the price fluctuations in more detail.

A Wide Range of Technical Indicators

In addition to charts, there is also a host of other technical indicators at the disposal of the technical analysts. These include technical indicators like:

  • Bollinger Bands
  • Exponential Moving Average (EMA)
  • Fibonacci Extension
  • Fibonacci Retracements
  • MACD
  • Parabolic SAR
  • Relative Strength Index (RSI)
  • Simple Moving Average (SMA)
  • Stochastics

Although technical analysis may initially seem to be overwhelmingly complex, it has been proven to be one of the most reliable tools that a Forex trader can use for predicting price fluctuations. Then again, it cannot be regarded as 100% accurate as there are a myriad of other factors that can affect the price of a currency.

The best result that one can obtain through analysis of the market is by combining the observations from both fundamental and technical analysis together. In this manner, a Forex trader can have overall view of the market as well as a microscopic look at a particular currency before deciding on his trading strategy.