What is technical analysis? Technical analysis is the art of deriving trade signals from charts. A pure technical analyst does not concern himself with data or statistics, focusing on the price action to the exclusion of everything else. Technical analysts believe that prices tell us all that there is to know. Since they already reflect all the information available to the trading community, there is no point on devoting any attention to fundamental data. One should focus his energies and analytical skill entirely on the price action.
Technical analysts refer to chart patterns, indicators, and historical data as they create trading strategies. They believe that prices discount all available information, and that price patterns are not entirely random: they repeat themselves over time, and it is possible to become profitable by understanding and studying common price formations that are repeated continuously in each day’s market action.
Technical analysis is a new discipline, with a history of slightly more than 100 years, in contrast to the centuries long development of fundamental analysis, albeit with no clear written and systematic study being available until relatively recently. It is also controversial. Although it’s highly popular among retail traders, its appeal to professional investors and large firms has been diminished since the 1987 crash. Critics claim that technical analysis is highly subjective, lacks rigor, and is widely rejected in the academic world. But in spite of any criticism, its great popularity among traders alone justifies its study by anyone interested in currency trading.
As long as you don’t have a blind belief in what technical tools tell you, and keep a vigilant eye on your risk, technical tools are a worthy addition to your trading arsenal. Just recall that trading is all about risk management; with that in mind, it is possible to use any approach to success in trading.
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