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Foreign Exchange (FX) Terminologies: Technical Analysis.

<strong>What is Technical Analysis?</strong>

Technical analysis is a method to predict future market movements or directions by&nbsp;studying what has happened in the past. This is most commonly done through the&nbsp;use of charts.

Technical analysis uses the price of instruments and the volume of trading to create&nbsp;charts as a main analysis tool.

Technical analysis can be displayed simultaneously on many markets or currency&nbsp;pairs.

The principles for Technical analysis are based on the Dow Theory. These are some of&nbsp;the main principals:

<ul> <li>The market knows everything which means that the actual price is a&nbsp;reflection of everything that is known to the market and those factors which&nbsp;can potentially affect it, such as &ndash; inflation, increase/decrease interest rates,&nbsp;ask and bid, political factors etc;</li> <li>Technical analysis uses recognition patterns to predict the market behavior.&nbsp;The patterns should give a high probability to predict the expected results;</li> <li>Through an overview of the history, we able to tell that Forex chart patterns&nbsp;repeat themselves periodically;</li> <li>Trends exist until they are changed and their reversals are confirmed.&nbsp;To confirm a trend you must have a relatively high volume of the total&nbsp;amount of a currency usually in one day. Large trading volume suggests that&nbsp;there is interest and liquidity in a certain market and low volume warns the&nbsp;trader to close positions.</li> </ul>

<strong>Technical Analysis advantages:</strong>

<ul> <li>Can be used to project movements of any asset available for trade in the&nbsp;capital market;</li> <li>Focuses on what is now happening which makes it valid at any price&nbsp;level;</li> <li>Technical analysis approach is based on prices which neutralize external&nbsp;factors;</li> <li>Technical analysis display indicators that sometimes point at the&nbsp;beginning or end of a trend which helps the investor to open or close&nbsp;positions.</li> </ul>

<strong>Technical Analysis critics claim:</strong>

<ul> <li>That signals about changing trend appear late which create a late&nbsp;reaction to the trader;</li> <li>That technical analysis that is made in short time intervals can suffer&nbsp;from "noise" and can cause misreading of market direction;</li> <li>That the traders are familiar with almost all the technical analysis&nbsp;methods.</li> </ul>
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Publication:International Business Times - US ed.
Date:Feb 15, 2011
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