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How to Perform Technical Analysis in Forex Trading

Technical Analysis is an approach to forecast price movements through analyzing historical price patterns, volumes, rates of change, open interest and so on, while ignoring the underlying fundamental factors.

There are three main goals with technical analysis: to determine (1) trend; (2) support and resistance; (3) possible reversal of or retracement from trend of the price market.

Trend is the general direction, either upward or downward, of price movement in forex market. By assessing the market trend, a forex trader can decide to long or short.

Support refers to a price level where new buying is expected to appear to balk the falling trend. If the support is broken, the price tends to move down at a significant amount. Resistance is a term in technical analysis referring to a price level where new selling is expected to appear to balk the rising trend; if broken, the price tends to move up at a significant amount. Through finding the support and resistance, one can pinpoint entry, target and exit points.

Entry and exit points can also be established via identifying trend reversal or retracement from trend. Reversal refers to a change of direction in the price movement of a currency pair in forex trading, whereas Retracement is a reversal within a major price trend of a currency pair in forex trading.

Another major type of technical analysis tools are chart patterns. There are traditional chart patterns such as double/tripple tops/bottoms, and candlestick patterns. See Technical Analysis: Candlestick Patterns for Forex Trading.

Technical analysis is indispensible for making profits in forex trading. Nevertheless, to be really successful in forex trading, technical analysis often needs to be combined with fundamental analysis and even sentiment analysis. Read How to Perform Fundamental Analysis in Forex Trading and Measuring Sentiment in Forex Trading for more information.

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