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Technical AnalysisOne of the major methods to forecast the market
behavior is technical analysis. Technical analysis is aimed at investigating the
dynamics of the market, usually with the help of charts, with the purpose to
forecast the future direction of the prices' movement. "Dynamics of the market"
implies three sources of information which are used by financial analysts:
price, volume, and overt interest. Price is the correlation due to which one
currency is changed for another. Volume shows the size of a given currency which
was bought/sold within certain period of time (most often -within one day).
Overt interest is the general volume of proposition or amount of a given
currency which is involved into trading at a given moment.
Modern
technical analysis is based on three principles, formulated by Charles Dow, one
of the founders of technical analysis.
- Market takes it all. Technical analysts suppose that all reasons,
which can influence the market in any possible way, will surely affect the
price. These reasons can be very different: economic, political, psychological,
etc. But all these reasons are already included into the price for the current
moment. That is why the only way for forecasting the market is monitoring the
price chart.
- Price movements go in trends. Trend or tendency belongs, to one of
the major notions in technical analysis. All fluctuations in currency rate go
together with certain trends. This means that current trend has all potentials
to developing further, without changing its direction. And also: the trend takes
place until it changes its direction to the opposite one. Most important while
studying the charts is to distinguish the trends on their initial stage and
trade accordingly.
- History repeats. Technical analysis and investigation of market
dynamics go alongside with examining human psychology. During the whole period
of using technical analysis a number of price charts models were found
classified, showing important peculiarities of market's psychological behavior.
These models visualize the trends which were dominating on the market. As human
psychology does not change with time, these models are very apt to take place in
future as well. So, studying the past helps in forecasting the future.
As it was mentioned before, technical analysis is concentrated mostly on
investigating the charts with preceding prices and volumes, aimed at forecasting
these changes in future. Technical analysis has worked out sufficient
instruments and methods for this aim: various types of charts, indicators, and
curves help to find out in charting material necessary trends, cycles, figures,
etc. This makes technical analysis a powerful instrument for predicting the
situation on financial markets.
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