Technical Analysis of the Forex Market

Along with fundamental analysis, technical analysis is one of the two main methods of informing oneself and building a stronger position to profit from the Forex market. While fundamental analysis allows you to predict the movement of a currency by looking at the political and economic position of a country, technical analysis has more to do with looking at collected market data and using it to predict future movement. This is an approach that is very commonly used on the stock market, for example, where historic data is the single most important part of predicting future performance.

While a fundamental analysis will look at the reasons for market movement – allowing us to know why something happened – the technical analysis of the same market will tell us exactly what happened. That is to say that it will give us the raw data. Fundamental analysis requires an extremely broad view and, for those who are disinterested in politics, can be overly time-consuming. If these people are strong technical analysts, they can usually learn enough from the movements themselves. Whatever the reason for a movement, the fact is that currency prices follow trends.

Regardless of anything else, people know that patterns have emerged in how foreign currencies behave, patterns which have held true for more than a century. These patterns mirror human behavior – one of the few constant things in the world – and therefore are an excellent way of predicting the future. You may not know who the President of a certain country is, but if you know how its currency performs over a period of time you are well within your rights to not care.

Forecasting forex rates is an acquired skill

It’s not easy to forecast the forex markets, but it’s what many forex traders and brokers do every day, with varying degrees of success. Like forecasting the weather, predicting the forex market is sometimes subjective, sometimes a guessing game if you don’t know how, but there is a science behind forecasting the rates which is worth your time to master.

Two major methods used to forecast the behaviour of the forex market are Technical Analysis and Fundamental Analysis which are useful forecasting tools for forex traders. Let’s look at them both.

Technical Analysis studies the effects by predicting price movements and future trends by studying what has happened in the past using charts. It is concerned with what actually happens in the market.
In other words, it examines past market action and uses that data to predict the future. Past trends in most areas of life are almost always good indicators of the future; and forex is no different.

Since forex rates change constantly throughout the day, every day, looking at all the years of past data can be daunting. Smart analysts learned to look at the big picture, to skip the minor details and examine trends over a longer period of time.

Using fundamental analysis to forecast forex markets is a bit more in-depth, but it can also be highly accurate. Basically, fundamental analysis means forecasting the market based on external factors — political moves, government involvement, social movements, even the weather. Someone good at fundamental analysis might forecast forex drop-offs because he knows a country’s government is unstable at the moment, or increases because the country has just elected a popular new leader. Anything that can affect a nation’s economy can affect the exchange rates, and that’s what a fundamental analyst uses to guess at the forex market’s future

Naturally, this means having to know a particular country in-depth, which is hard to do for more than a few countries at a time. (It becomes even more complicated when trying to forecast the euro, since several different countries use that currency.) But having that kind of intricate knowledge makes it much, much easier to forecast forex trends.

Most good forex traders use a combination of both techniques, technical and fundamental. For example, a trader might see that a country is currently facing a particularly strong unemployment rates (fundamental) and know that in the past, strong unemployment rates have meant a weaker economy for that nation (technical). Thus, he can predict down-turns for that nation with some degree of confidence.