Forex Charts an IntroductionWhen you use forex charts you are engaging in technical analysis of forex prices so what is technical analysis? It is simply defined as the study of price action through the use of charts - for the purpose of identifying price trends. Forex technical analysis is based upon the following simple equation:
Market Perception (trader perception) + Fundamentals (supply and demand)
= Price Movement
Forex technical analysis simply assumes that all known fundamentals are quickly reflected in price action (and today with instant communications available to all traders this is truer than ever before) forex technical analysis and the study of forex charts is not interested in studying what the fundamentals are but their effect on price.
The Price action simply gives the forex chart user the whole picture – it not only reflects all the fundamentals, but more importantly, how all the participants perceive them.
The Importance of Human NatureIn any market it is humans that determine the price of anything. We all have the same facts at our disposal but we all see them differently and it is our perception and that of millions of other traders which determines price.
As humans we tend to push prices to far up or down as we are succumb to the emotions of greed and fear, the importance of human nature as the critical factor in price direction is there for all to see.
For example, some of the largest price moves in history have taken place with little or no change in the fundamentals. It’s a fact that markets are most bullish at market tops and most bearish at market bottoms. This is human psychology was at work.
Human Nature is ConstantHuman psychology is constant and this means that patterns that have occurred in the past will re occur. If you can learn to spot these patterns, you can act on them to get into and hold the long term forex trends, as well as spotting important trend changes.
Learn to use forex charts, and you will see the reality as it is – you are trading the truth, rather than listening to the opinions of others or letting your emotions get involved.
Let’s give a quick review of the core assumptions that forex technical analysis is based upon:
1. Markets Discount ALL FundamentalsAll fundamentals show up quickly in the price action.
By studying forex charts you study the fundamentals, as they are and more importantly, you are seeing how the participants perceive them - all at the same time. This gives you the big overall picture.
2. Trends PersistThis is obvious by simply looking at any Forex chart.
You will see forex trends lasting for months or years. Forex technical analysis assumes that a trend once in motion is more likely to continue than reverse. The aim of any forex trader should be to catch these trends, hold them and pile up big profits.
3. History RepeatsFact: Human nature never changes.
Forex chartists believe that what has happened in the past will happen again, as human nature causes reoccurring chart formations, these formations can be seen on a forex chart and then traded for profit.
As human nature never changes Price patterns reflect shifts in human psychology, we can therefore look for certain specific reliable patterns to repeat themselves, again and again.