3 Principles of Forex Technical Analysis

Forex (also known as foreign exchange or fx) technical analysis, which is a widely used currency trading methodology throughout the world, is based on three essential principles. The first principle is that the fx market action discounts everything. The actual market price is a reflection of everything that is known to the market that could possibly have an effect on the price movement. The pure technical analyst is concerned only with price movements, and not with the reasons for any changes.

Secondly, prices move in trends. Price can move in 3 directions, i.e. they can move up, down or sideways. Once a trend in any of these directions is in effect it will usually persist and create a trend. Technical analysis is also used to identify patterns of market behavior that have long been recognized as important. These patterns will usually behave the same way as in the past, as long as you can recognize and make out what they are. They have proven to be consistent in predicting future moves. If you are able to correctly identify the chart patterns, and what is the next price movement, you will be able to limit your losses and maximize your profits.

And thirdly, history repeats itself. Technical analysts believe that investors collectively repeat the patterns of their investing behaviors. They tend to act and react the same way to different types of stimulus, such as economic data or other news. As investor behavior repeats itself so often, it is possible to chart recognizable market patterns for analysis.

Therefore, a trader who is a purely technical analyst would not be concerned about market news. He would use the charting patterns as the market took the news into account and act accordingly. However, although widely used, there are some disadvantages to this trading methodology.