This article looks at the basis of technical analysis of the foreign exchange rate.
There are a lot of traders who look at using technical analysis to determine what the foreign exchange rate is going to do. If you are one of these traders then you need to understand the three basic assumptions that technical analysis is based on. When you know about the basis of technical analysis you will be able to use it with greater ease to determine the foreign exchange rate movements.
The Three Assumptions of Technical Analysis
There are three basic assumptions that technical analysis work on. The first is that the market discounts everything. The second is that the price moves in trends and the last is that the history of the foreign exchange rate tends to repeat itself.
It is important that you understand all of these assumptions and what they mean for you trading and the analysis you complete. If you do not know what the analysis is based on then you will not be able to complete it correctly.
The Market Discounts Everything
One of the reasons why technical analysis is often criticised is due to the fact that it only looks at price movement. This means that the fundamental aspects of the currency pair are ignored. The true technical trader believes that the movement of the price incorporates all the other factors that will affect the currency pair. This means that the movement you see on the market has already taken all of the other factors into account.
The true technical trading believes that when you analyse the price movement you are also analysing the reaction to the other factors of the forex market. While this is true you have to consider that there is no anticipation when you do not know about the fundamentals of the currency pair.
The Price Moves in Trends
The second assumption that technical analysis is based on is that the price moves in trends. There are some traders who refute this by saying that the market will also move in ranges. However, the true technical trader will often view ranges not as the lack of trends, but rather the market moving in trends within a set range. As the price of the currency pair will never move sideways completely this means that there are always going to be trends.
The trends that you find in the range may be extremely short-term and not a viable trading option. However, they are trends and this will confirm this basis of technical analysis to the true technical trader.
The History of the Foreign Exchange Rates Repeats
The last assumption that technical analysis is based on will be that history repeats. When you look at the market you will find that the market does go through stages and that the prices repeat. However, you should not create a trading strategy that is based solely on this.
The repetition of the movement will not be at the same price, but rather through the patterns that are found in the market. It is this repetition that allows you to trade on the price patterns that you find on the forex charts.
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