Technical analysis is the study of price action, using technical tools and market patterns, to predict the future price projections and trends.
Technical analysis is based on three premises:
Anything that could possibly affect the price whether that be news, politics, or psychology of the market, are all shown in the price of that currency. Based on that knowledge, studying the chart is the key to forecasting future price trends. Studying the charts and looking for market patterns is really all that is needed. Fundamental news news tend to follow technical analysis and you will see this later on many examples.
When you study the charts through the use of technical analysis, you are indirectly studying the fundamentals as well. If a currency pair falls, the fundamentals must be bearish for that currency pair, therefore, this currency pair is bearish. It is no the charts that cause the market to move but rather the forces of supply and demand and economic fundamentals of the currency pair. The charts simply reflect the psychology of the market.
Understanding and determining the trend is an important aspect of technical analysis. Prices move in trends and being able to identify the trend in the early stages of their occurrence for the purpose of getting into the trend is what will lead you to success in trading. When price moves in trend, it will tend to stay in that same trend until it shows signs of exhaustion.
Technical analysis has a lot to do with human psychology and how people think and react. It’s heavily reflected on the price action and you’ll be able to spot this through chart patterns and key levels. Chart patterns show up in the market because they show the decision and indecision of traders. After identifying past chart patterns, you will find that they show very similar behaviors. They based on the study of human psychology, which tends to stay the same. Therefore, studying the past price action data is an important part in forecasting future trends and projections of a currency pair.