3 Forex Technical Analysis Principles

Forex (also known as foreign exchange or currency exchange) technical analysis, which is a very widely used methodology in currency trading around the world, is based on three basic principles. The first principle is that actions in the forex market are second to none. The real market price reflects all that is known in the market that could possibly influence price movements. A pure technical analyst is only concerned with price movements, not the causes of any changes.

Second, prices are trending. The price can move in 3 directions, ie. they can move up, down, or sideways. Once the trend in either of these directions is in place, it will usually persist and create a trend. Technical analysis is also used to identify patterns of market behavior that have long been recognized as important. These models usually behave the same as in the past, as long as you can recognize and understand what they are. They have been consistent in predicting future moves. If you are able to correctly identify the patterns of the chart and what the next price movement is, you could limit your losses and maximize your profits.

And third, the story repeats itself. Technical analysts believe that investors are collectively repeating patterns of their investment behavior. They tend to act and respond in the same way to different types of incentives, such as economic data or other news. Because investor behavior is repeated so often, it is possible to outline identifiable market models for analysis.

Therefore, a trader who is a pure technical analyst will not be bothered by the news on the market. He would use charting schemes as the market took into account the news and acted accordingly. However, although widely used, there are some drawbacks to this trading methodology.