Technical analysis is one method of understanding the movements of currencies by studying past price movement. It is a way of using the past to predict the future. Forex trading, or fx trading, generally relies on either fundamental analysis or technical analysis to generate trading signals, although no trader relies strictly on one method without the inclusion of the other.
A Forex trader who primarily relies on technical analysis will utilise price charts, historical movement and volume charts, along with a knowledge of the economic policies of the country or countries in question, to anticipate when a particular currency is going to rise or fall against another. For example, using a price chart, the trader may see that in September of each year a key economic report is released, and that the currency in question generally trends higher for about three weeks after that report.
Using this information, the trader can then buy or sell the currency just prior to September and, assuming the past repeats itself, sell that same currency approximately two to three weeks later for a higher price. Of course, history does not always repeat itself, so most savvy technical Forex traders also keep tabs on some of the indicators for fundamental analysis, such as economic indicators and what key politicians are saying in the country they are studying.
Utilising price charts and other methods of technical analysis helps keep emotion out of the trading process and bases Forex currency trades on solid statistical data. Technical analysis is a strongly mathematically-based analysis method, so traders using this often rely on computerised software to “run the numbers” for them quickly and correctly.