Lesson 2: What is Technical Analysis

What’s a better way to predict how the forex market can move in the future than studying the historical representation of its past movements? 

This rhetorical question captures the principle behind technical analysis.  

In this lesson, you’ll gain a more in-depth understanding of this market analysis method and how you can use it to become a better trader. 

Lesson Highlights 

• Technical analysis relies on historical market data to predict potential future market behavior. 
• Analysts who use technical analysis are known as technical analysts, while traders are called technical traders. 
• Proponents of technical analysis believe that current market prices are key to knowing how the market will behave. 
• Technical analysts use technical indicators, such as Bollinger Bands and moving averages, to predict the future movements of the market. 

What Is Technical Analysis in Forex? 

Technical analysis is one of the three primary methods of predicting how markets may behave in the future. This technique uses historical market data, specifically price movements and trading volume, and draws patterns from these. 

In this approach, analysts use technical indicators, such as chart patterns and mathematical formulae, to study market data and identify price patterns. They then use these patterns to predict the future movements of the market. 

Market analysts using this technique are called technical analysts, while traders who rely on it are known as technical traders. 

Users of technical analysis believe that market prices hold all the information they need to decipher the market’s next moves. 

Past market data shows how the forex market behaved in the past. Since the market has already exhibited it can move in a certain way, technical analysts believe that it can repeat itself in the future. 

What Are Technical Indicators? 

Technical indicators are the tools of the trade in technical analysis. These tools help technical analysts “read” market data and predict future market behavior. 

Below are a few examples of technical indicators. 

Support and Resistance Levels 

This technical indicator refers to the lowest and highest points that a price trend reaches before going into reversal. 

The support level refers to the lowest point that a trend touches before slowing down and eventually reversing. Conversely, the resistance level is the highest point in an uptrend where the price starts moving in the opposite direction. 

Support and resistance are the bread and butter of technical analysis. Many other indicators incorporate the support and resistance levels and use them to predict future price movements. 

Moving Averages 

Traders commonly use moving averages in stock market analysis, but you can use them in the forex market, too. 

This indicator works by determining the sum of all data points in a given period and dividing the result by the number of time periods. 

Traders use moving averages to generate trading signals, which they use to identify market trends. 

Bollinger Bands 

Bollinger Bands are a technical indicator that builds up on the concepts of support and resistance and the moving average. 

Three “bands” comprise this indicator. The top band represents the resistance level, the bottom is the support, and the middle is the moving average. 

Bollinger Bands helps traders identify overbought and oversold conditions in the market. In turn, these conditions tell traders where possible reversals can occur.