Chapter 12
Technical Analysis
Introduction
How do traders make the decision to buy or sell a currency pair?
The most popular and successful method of making decisions and analyzing FOREX markets is technical analysis. Technical analysis is used by large and small traders alike. Technical analysis ignores fundamental factors and is applied only to the price action of the market and derivative quantitative information such as volume, tick-counts, price ranges, and volatility.
Although fundamentals are the market’s ultimate prime mover, they can often provide only a long-term forecast of exchange rate movements. Technical analysis has become the tool of choice to successfully analyze and trade shorter-term price movements, as well as to set profit targets and stop-loss safeguards because of its ability to generate price-specific information and forecasts.
Technical analysis is based on the axiom that prices have some form of memory and that information is transferred from one price-time state to the next and successive states. This is easy enough to understand at an intuitive level: If a trader buys, he acts as an upward force on prices as he increases demand. If a trader sells, he acts as a downward force on prices as he increases supply. If you buy, you must later sell; if you sell, you must later buy. Thus, information on all orders in a market is in fact carried forward and the market does indeed have memory.
Historically, technical analysis in the futures markets has focused ...
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