One of the major methods to forecast 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 that are used by financial analysts: price, volume, and overt interest. Price is the correlation due to which one currency is changed for another. The volume shows the size of a given currency that was bought/sold within a certain period of time (most often -within one day). Overt interest is the general volume of proposition or amount of a given currency that is involved in trading at a given moment.
Modern technical analysis is based on three principles, formulated by Charles Dow, one of the founders of technical analysis.
- The 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 in the price for the current moment. That is why the only way for forecasting the market is by 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 the currency rate go together with certain trends. This means that the 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 the market's psychological behavior. These models visualize the trends which were dominating the market. As human psychology does not change with time, these models are very apt to take place in the 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 the 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 in financial markets.