The forex technical analysis is concerned with what has actually happened in the forex market, rather than what should happen.
A technical analyst will study the price and volume movements and from that data create charts (derived from the actions of the market players) to use as his primary tool. The technical analyst is not much concerned with any of the “bigger picture” factors affecting the market, as is the fundamental analyst, but concentrates on the activity of that instrument’s market.
Technical analysis is based on three underlying principles:
1. Market action discounts everything
This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. The pure technical analyst is only concerned with price movements, not with the reasons for any changes.
2. Prices move in trends
Technical analysis is used to identify patterns of market behaviour which have long been recognised as significant. For many given patterns there is a high probability that they will produce the expected results. Also there are recognised patterns which repeat themselves on a consistent basis.
3. History repeats itself
Chart patterns have been recognised and categorised for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little with time.
List of categories of the technical analysis theory:
* Indicators (Oscillators, eg: Relative Strength Index RSI)
* Number theory (Fibonacci numbers, Gann numbers)
* Waves (Elliott wave theory)
* Gaps (High-Low, Open-Closing)
* Trends (Following Moving Average)
* Chart formations (Triangles, Head & Shoulders, Channels)