The study of price action has become the mainstay of traders as the internet age has merged trading prices being recorded on charts in real time. Traders love technical analysis because of the argument that all news or fundamental analysis is priced into the chart. Technical trading is like getting into the mind of the market to see what it may likely do next based on historical behavior as opposed to what it should do based on the news alone.
The study of price action has become the mainstay of traders as the internet age has merged trading prices being recorded on charts in real time. Traders love technical analysis because of the argument that all news or fundamental analysis is priced into the chart. Price is also the best way to see the emotions and collective behavior behind price and price patterns. It is easier to make trading decisions in terms of entries and exits from price action and the historical behavior pattern of prior traders.
Forex has many of the same technical tools that are used in stock trading. A technical forex trader will assess the price action, trend, support and resistance levels. Many of the patterns used in equities trading are also traded in foreign exchange including those noted above. Additionally, the indicators and oscillators added to a price chart are very similar between the stock and foreign exchange markets. Moving averages, Bollinger Bands, MACD, Relative Strength Index, and stochastic tend to be some of the more common tools in a technical traders toolbox.
Theoretically, a news event or the release of economic data should impact the price in a specific way. For instance, an increase in employment in the United States should have a positive impact on the USD. As a result, the EUR/USD should go down. A fundamental trader would most likely enter a Short EUR/USD. This happens in theory only! In reality, things are far from being perfect. A positive news in the United States could actually cause an increase in EUR/USD.
Technical analysis is simple and straightforward, with tools available to everyone from the seasoned hedge fund manager, to the novice retail trader. In addition, technical tools are easier to interpret than fundamental indicators, the understanding of which usually requires a period of diligent study. Finally, since technical analysis focuses on the price action exclusively, the technical trader has only one needle in his compass: the price, on which any calculation about profits or losses must be based. Technical studies have been refined and perfected over the years, and by using them we are making use of the heritage of thousands of experienced and knowledgeable traders who have contributed to the effort.