Using Technical Analysis To Forecast A Forex Market Direction

by Susan Paige on September 19, 2019 · 0 comments

The Forex market is ever changing, and it changes cyclically hence the need for traders to be forward thinking if they want to be successful. What this means is that there are usually times in the Foreign Exchange market when traders can predict the price behavior.

If asked, big investors in the forex market or successful forex traders will say that their knowledge and ability to predict the forex market is what made them good at what they do. Therefore, if you can predict price behavior you can earn on the market, but on what basis can you predict the direction of the market?

Technical analysis

In lay man’s terms, technical analysis is the study of the historical movement of the price chart for the purpose of identifying patterns as well as determining probabilities by using technical studies, indicators among other analysis tools. In essence, this means attempting to forecast Hong Kong’s future FX market price movements by thoroughly examining past price data, with the argument that history repeats itself especially in predictable patterns. In this case, such patterns are known as Forex signals.

Essentially, technical analysis comes down to two things:

  • Identifying market trend
  • Identifying resistance or support by using the timeframes and/or price charts

While markets can only move down, sideways or up, prices move in a zigzag way resulting in only two states:

  • Trend: This is when prices either zigzag lower also known as bear trend or down trend or zigzag higher otherwise known as bull trend or up trend.
  • Range: This is when the price zigzags sideways.

How to use technical analysis to predict price direction

The theory of technical analysis is based on the idea that markets are chaotic, and no one knows for sure what might happen next. The same theory also believes that price action is not completely random. To simply put it, the technical analysis theory believes that even in a state of chaos, one can find identifiable patterns that repeat themselves.

When it comes to predicting the exact forex market direction, most traders believe that there are no certainties. This means that successful trading is not about being wrong or right but determining market probabilities and then taking trades every time, the odds are in your favor. Forecasting market direction as well as where and when to enter into a position is all part of determining market probabilities. In addition to this, determining one’s risk-to-reward ratio is equally important.

Tools used for technical analysis

There are a plethora of technical analysis tools used for predicting prices, here are some of the most popular and effective instruments:

Indicators– These are universal tools that allow traders to determine necessary parameters such as strength and direction of the trend, warning on upcoming reversal and market condition and also automatically build various levels, waves and lines on a currency pair chart.

Linear tools– These are represented by horizontal, vertical and trend lines. Trend lines allow traders to assess the current trend while horizontal ones allow traders to draw the trend price channel. Not only do vertical lines work as a good guide to the start of a new trading session but also mark the release of crucial news reports.

Technical analysis chart patterns– Chart patterns allow you to qualitatively analyze and supplement your technical analysis. Since currency pairs charts follow similar trends, it makes it possible for you to predict the extension of a trend as well as its reversal.

Importance of technical analysis

Technical analysis believes that price movement is unpredictable by nature and that market fluctuations are not random. For this reason, once a certain type of trend is established then it is likely to continue for a certain period thus giving a trader a chance to predict it next time it happens. Therefore, the technical analysis of a market is important because it can help you determine where and when to enter a market as well as where and when to get out.

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