Forex Technical Analysis in Non Technical Terms

By: Sara Patterson

What is technical analysis and why should you care? Well, let’s start with the fact that what separates Forex from gambling is the fact the in Black Jack or poker, the hand you receive from the dealer is purely and completely based on luck. There is absolutely no way to decipher what your hand will be (unless you know how to count cards), and therefore, there is nothing you can do to be prepared.

Forex, on the other hand offers you the ability to predict with high probability what the future will bring for a currency. Now, of course, there are no guarantees, and it is very possible that based on your analysis, you predict the currency will go one way, and it ends up going the other. However, the Forex experts out there, who truly know how to analyze the charts, will make predictions that are accurate 7 out of 10 times, and sometimes even more.

The basic principle of Forex technical analysis is of course the famous saying “The trend is your friend”. What does that mean? Well, in ultra simple terms, it means that there is no real reason to assume a current trend will reverse itself without a driving force. Just like in life, an action brings a reaction, and without the action of a news announcement or a financial event, no reason the reaction of a trend reversal should take place.

Having said that, the analysts who are followers of the fundamental school of thought will uproot the claim that a trend reversal is unlikely by proving that all trends eventually come to an end or even worse, reverse themselves. The US Dollar might go up against the EUR, but eventually it will stop, even if there is no major announcement.

It is for this reason that the real Forex experts out there will tell you that technical analysis alone is an insufficient tool for Forex traders. It is only half the equation. Forex charts and trends should receive the attention they deserve, but only in the context of fundamental analysis on the side.

A Forex trader who wishes to succeed should pay close attention to the charts with one eye, and the other eye should be focused on the financial news site or channel. Even once you do that, there still are no guarantees, but your chances of success cannot be compared to your chances in a casino. In fact, once you use technical and fundamental analysis properly to analyze the Forex market, your chances of success are much more similar to a meteorologist accurately predicting tomorrow’s weather. It may not be 100% but it's a definite science that is often on the mark.

See real-life instances in which traders used Forex technical analysis to trade profitably.

Sara Patterson has a Master’s Degree in political science and enjoys analyzing both current events and the international markets to get a fuller perspective of the currency market. Before turning to financial writing, she taught English writing skills to high-school age students. Sara’s work has been published on various financial and Forex blogs.