Forex Trends

Written by Jacey Harmon
Bookmark and Share

To identify market trends and shifts in those trends, traders use technical analysis. Technical analysis is the study of market driven data. Actual market prices and volumes are the two main components of technical analysis. From price and volume a trader can generate various studies to analyze the market's trend.

The Assumptions and Tools of Technical Analysis

Technical analysis operates under some basic assumptions. One of the main assumptions is that the market is driven by human emotion. Though environments, technologies, and economies change over time, human emotion has remained the same. Technicians look to charts to identify trading patterns caused by two emotions: fear and greed.

Many also believe technical analysis assumes everything is clearly priced into the market. Pure technicians believe all fundamentals are already priced into the currency. In the opinion of this author, it is best to use fundamental and technical analysis. Technical analysis also assumes that prices move in trends. Once identified, you can expect to profit from price trends and patterns that have historically been successful.

The main tool for technical analysis is the chart. A chart will show the actual price history of a currency pair. Only with the use of charts can you visually see the price patterns technicians look for. Charts can be built to include other studies that involve market prices. The stochastic oscillator is a complex moving average that can be used to time tops and bottoms. The relative strength index (RSI) is used to identify "overbought" and "oversold" conditions. It is best to use these studies in conjunction with traditional price and volume analysis as they can show false signals on their own.

Bookmark and Share