Principles of technical analysis

Most novice Forex traders underestimate the role of technical analysis and begin trading purely on intuition. Only after initial failures do they move on to a more in-depth study of the theoretical foundations of analysis.

When beginning to learn the basics of technical analysis, it's important to understand the fundamental principles upon which it is based. There aren't many of them, so familiarizing yourself with them won't take much time.

The principles of technical analysis reveal its essence and make it possible to understand what you should pay attention to first.

1.    The price includes everything – In order to understand what is currently happening on the currency market, it is quite sufficient to analyze the current price; it is the price that contains all the fundamental factors.

The price reacts by its behavior to both external and internal factors influencing the exchange rate. Any event is immediately reflected in the price change. Therefore, according to technicians, it is not at all necessary to follow fundamental news, but rather to carefully monitor the price.

2. The trend has a distinct direction - even when the exchange rate of a currency pair does not change, the trend still moves in time, parallel to the time axis.

Therefore, in practice, there are three types of trend direction - ascending, descending and horizontal.

• Uptrend - displays a positive change in the rate over a certain time period.
• Downtrend - indicates a predominant decrease in price over the analyzed time period.
• Flat Forex - the price does not have a clearly defined vertical direction and moves along a horizontal plane.

It is the correct determination of the price movement direction that forms the basis of a profitable position. The main trend should not be confused with a correction or a reversal taken for another trend correction.

3. The trend moves in a curve – if you learn to take this principle of technical analysis into account when trading, you can consider yourself certain of making a profit. This is the reason for the majority of unsuccessful trades. The price almost never moves in a straight line; every move in the direction of the existing trend is followed by a correction or counter-movement.

The ability to distinguish a correction from the main movement is the foundation of Forex trading. Identifying the main movement is not easy, especially if you trade on medium-term or long-term timeframes; following the latest news can help here.

4. The principle of time frames – considering the duration of time frames is quite important, as the trend direction on different timeframes can be completely opposite. You should always clearly know the direction of the main trend and open trades on shorter timeframes based on this.

5. History repeats itself – this is the principle used by most technical indicators and automated advisors. The price reacts uniformly to certain market conditions, so identifying historical patterns always yields good results.

6. Everything is interconnected – technical analysis widely uses the concept of correlation, the essence of which is that there is a certain relationship between each currency and when the price of one currency rises, the exchange rate of another, related currency changes.

7. You can't be sure of anything –
 
even an open trade requires constant monitoring; you should trade according to the market, not according to forecasts. And if the market situation changes, react immediately. These principles of technical analysis are used in virtually every known Forex trading strategy , so knowing and understanding them will significantly facilitate the trading process.