The Three Aspects of Technical Analysis in the Forex Market

By: Justin Stewart

When you discuss technical analysis, especially where its applications in the Forex market are concerned, it's important to understand its basic underlying principle. Simply stated, past price fluctuations (historical) will influence and help to predict future price activity. Additionally, it is important to realize that no matter what type of asset is being gauged or monitored that technical analysis remains unchanged in function. The aspects of technical analysis are what changes or fluctuates, not the premise it is based upon.

Common Indicators
Predicting any future fluctuations or movement in exchange rates normally results from traders using a variety of indicators combined with the support of or the resistance to them. The interpretation of all the different technical indicators is a subject field unto itself and will be covered at another point in time. Due to their popularity, the technical indicators worth mentioning (and possibly studying in the future) are:

* Bollinger bands

* Fibonacci retracement

* moving averages

* moving average convergence divergence (MACD)

* stochastics

Minimal Rate Inconsistencies
Hedge funds and the larger banks are considered two of the major players in the Forex market, and all of them employ the use of computers and sophisticated software in order to constantly monitor fluctuations and movements of currency exchange rates. More importantly, they use their computer system software another important reason --- to monitor any noticeable inconsistencies between the different currency pairings.

Taking their systems and software applications into consideration, most of the major inconsistencies that are encountered are normally gone with the blink of an eye. In other words, they only last for a few seconds. Many investors and traders utilize technical analysis because it makes presumptions (not assumptions, big difference here) about key factors that will influence a currency's movement in the Forex market. This would include factors classified as the following:

* Economical

* Political

* Psychological

* Social

The presumption is that all of these factors are taken in consideration by the technical analysis format that is used and therefore have been factored into the exchange rates used by the current market being studied. Because so many investors now participate and so much money changes hands, what becomes of major importance is the flow of all that capital rather than attempting to identify rates that are incorrectly priced.

Trend or Range
The determination of movement that two paired currencies make in certain directions, as well as predicting whether or not those currencies travel sideways in a "range-bound" manner, is always the goal of investors and traders that are very successful in the FX market. Once you take that premise into consideration, it becomes apparent that the tendency is to draw trend lines and patterns that connect the higher levels of the past which have in turn prevented an exchange rate to appreciate or depreciate.

These are referred to as levels of either resistance or support. This method is utilized by investors and traders in order to make the determination that a given trend (or the lack of one) will continue. Generally, the major pairings of currencies (such as EUR/USD, USD/JPY, and GBP/USD) have been known to show the greatest tendency towards the establishing of trends in the Forex market.

Foreign Exchange
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