There are two necessary methods in forecasting the currency market, fundamental analysis and technical analysis.
technical analysis focuses on the study of price movements. Historical currency data is used to forecast the direction of future prices. The premise of technical analysis is that all current market information is already reflected in the price of that currency; therefore, studying price action is all that is required to make informed trading decisions. The primary tools of the technical analyst are charts. Charts are used to identify trends and patterns in order to find trading opportunities.
Basically, technical analysts use historical data to predict future currency moves. There are many different variations of how to analyze this historical data. To better understand technical analysis, we will start with the most basic principles, moving forward to the more complex. Before we commence, it is important to point out that technical analysis is based on three underlying principles:
Market action discounts everything
This means that the actual price is a reflection of everything that is known to the market that could affect it. For example, supply and demand, political factors and market sentiment. The technical analyst is only concerned with price movements, not with the reasons for any changes.
Prices move in trends
Technical analysis is used to identify patterns of market behavior which have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. It is also helpful that there are recognized patterns which repeat themselves on a consistent basis.
History repeats itself
Chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little with time.