Introduction to technical analysis

What is technical analysis?

Technical analysis is one way investors try to anticipate the price movement of a country’s currency. Technical analysis offers investors several different approaches to trading. Fibonacci analysis and the Elliott Waves theory, for example, go back to the DOW theory that markets move in a predictable way, in patterns. Technical analysis focuses on reading chart patterns and believes that past price activities are going to repeat themselves. Technical analysts completely ignore all of the fundamental information and focus strictly on price charts.

Technicians search for special patterns, such as the well-known head and shoulders or double top reversal patterns, study indicators such as moving averages, and look for forms such as lines of support or resistance, channels, and more obscure formations such as flags or pennants.

Double tops and double bottoms are a way to look at charts. A double bottom can be recognized as the letter W on a chart. In theory, the currency will not fall below the two lowest points of the W.

Double bottom formationDouble bottom formation

Double bottom marks the price where the currency will stop falling and move higher once it reaches the support level. A double top represents what is called the resistance level that the currency may not rise above. It looks like the letter M.

Double top formationDouble top formation

Once the W is formed investors typically buy; when the letter M is formed they typically sell.

Why does technical analysis work? If enough people are drawing the same trend line, if enough people are focusing on the same support level, there is going to be a reaction when that support level is reached. In conclusion we could say that technical analysis works because the number of people following it make it a self-fulfilling prophecy of trading.