Analysis

Technical Analysis

One way many FX traders forecast future rate changes is by analysing the patterns of past movements. This is often referred to as technical analysis, a practice that has been used since the late 1800s. Since the 1990s it has gained even more importance through increased use of computer models and advanced charting techniques.

Currencies rarely spend much time in tight trading ranges and typically develop strong trends. Over 80% of volume is speculative in nature, which creates a market that frequently overshoots and corrects itself. A technically trained trader is able to identify new trends and breakouts that provide multiple opportunities to enter and exit positions.

Technical Analysis Using Charts

The use of charts to identify price patterns is a classic technical analysis method. Charts are used to create historical records of price movements that provide key information needed for the analysis of the currency trends. There is no fixed methodology used to interpret chart data, but the ability to recognise basic patterns can help to predict future price movements. Pattern recognition is a hands-on and labour intensive exercise requiring careful visual examination of the price chart. The explanations below are designed to introduce various chart patterns, but should never be interpreted as complete or conclusive evidence that can be applied to a specific trade.

Applying Technical Analysis

Charts can be used on an intraday (5 minutes, 15 minutes), hourly, daily, weekly or monthly basis. The chart you study depends on how long you intend to hold a position. If you are trading short-term, you may wish to refer to 5-minute or 15-minute charts. If you intend to hold a position for a few days, an hourly, 4-hour or daily chart could be preferable. Weekly and monthly charts compress price movements to allow for much longer-range trend analysis.