Table of Contents

Lesson 7: Technical Analysis

7.1 Introduction


Market Price Reflects All Known Information

Technical analysis is the study of market action, using charts, for the purposes of forecasting future price trends. The primary cornerstone of technical analysis is based on the idea that the currency price is a comprehensive reflection of all market changes in the balance between supply and demand as caused by traders' reactions to economic, political or psychological changes. The market price of any given currency takes into account the effect of all possible forces acting on that commodity, therefore those that adhere to technical analysis believe it is redundant to study fundamental analysis.

Chart Patterns

Much of the body of technical analysis and the study of market action have to do with the study of human psychology. Chart patterns, identified over the past century, reflect bearish or bullish market patterns and are based on traders' psychological reactions to certain supply/demand fluctuations. Assuming that the innate nature of human psychology does not change, patterns that have worked in the past are assumed to be viable forecasting tools for the future.

Concept of Trend

The third and final principle of technical analysis is the concept of trend. Market prices will continue in a trend until the trend reverses. The purpose of charting the price actions of a market is to identify trends in the early stages of their development with the intent of trading in the direction of those trends and continuing to ride these trends until they show signs of reversal.

In this lesson we are going to explore several key topics. We will start by describing chart types and the idea of trends. Next, we explore support and resistance levels and trendlines. Afterwards, we will look at common chart patterns that signify either an upcoming reversal of a trend or a period of consolidation during a continuing trend.