There are 2 major schools of market analysis in the world of foreign exchange trading. Fundamental and Technical analysis are both used by traders to try to predict where the markets will go in the near term and longer term. Of the two types of analysis, the one used by almost all Forex traders is technical analysis.

What is technical analysis? First, before the reader “runs for cover” at the very mention of the word “technical”, let me say that it could just as easily be referred to as “price analysis”, since this would be a more accurate description. Simply put it is the study of the relationships of price and time on a price chart, and the patterns those have produced in the past, in order to predict where the price will go in the future.

Traders spend a great deal of time and effort studying different patterns on charts, and trading the markets as they see those particular patterns repeat over and over. Of course there are those traders who believe in the “random theory” of market behavior, and don’t believe that any patterns repeat, or that there is any order in the market whatsoever.

Actually, studying price history can be compared to studying human nature. Even though humans can be unpredictable in many ways, yet they are also creatures of habit. It is this idea of recurring events that is behind the science of technical analysis. The Forex market is also a “creature of habit”. As with any financial market, it is the sum total of all of the players’ psychology acting on the market at any one time.

So, where does a new trader begin? One of the best ways is to buy one of the many great books that have been written over the years on technical trading. A few good authors include Welles Wilder, John J Murphy, and Jack D Schwager.

You will find as you begin your education that there have been literally hundreds of different mathematical indicators developed over the years to “help” the trader with his technical analysis. It is easy to fall into the trap of thinking that if I just use the “right” ones, or a combination of the “right” ones, then I will never lose!

The more logical approach to these indicators, and one that professionals in the markets take, is to learn some of the more popular ones, study their use in the markets, and get proficient at reading a few of them. If you get familiar with a few, over time you will be able to use them accurately and combine them into a useful trading strategy. There are no shortcuts, you will have to put in the time and effort.

Technical analysis is a method that you will definitely need to become familiar with and make a part of your trading plan from day to day. With time and familiarity, it will become a very useful tool in your continued education and long-term profitability.

By: Barry Hines

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