Foreign Exchange (FX) Terminologies: Technical Analysis.
Technical analysis is a method to predict future market movements or directions by studying what has happened in the past. This is most commonly done through the use of charts.
Technical analysis uses the price of instruments and the volume of trading to create charts as a main analysis tool.
Technical analysis can be displayed simultaneously on many markets or currency pairs.
The principles for Technical analysis are based on the Dow Theory. These are some of the main principals:
<ul> <li>The market knows everything which means that the actual price is a reflection of everything that is known to the market and those factors which can potentially affect it, such as – inflation, increase/decrease interest rates, ask and bid, political factors etc;</li> <li>Technical analysis uses recognition patterns to predict the market behavior. 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 repeat themselves periodically;</li> <li>Trends exist until they are changed and their reversals are confirmed. To confirm a trend you must have a relatively high volume of the total amount of a currency usually in one day. Large trading volume suggests that there is interest and liquidity in a certain market and low volume warns the 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 capital market;</li> <li>Focuses on what is now happening which makes it valid at any price level;</li> <li>Technical analysis approach is based on prices which neutralize external factors;</li> <li>Technical analysis display indicators that sometimes point at the beginning or end of a trend which helps the investor to open or close positions.</li> </ul>
<strong>Technical Analysis critics claim:</strong>
<ul> <li>That signals about changing trend appear late which create a late reaction to the trader;</li> <li>That technical analysis that is made in short time intervals can suffer from "noise" and can cause misreading of market direction;</li> <li>That the traders are familiar with almost all the technical analysis methods.</li> </ul>
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|Publication:||International Business Times - US ed.|
|Date:||Feb 15, 2011|
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