Technical analysis is the study of market dynamics (price, volume, and open interest) aimed at forecasting future price movements.
On the Forex market, traders primarily rely on price history, because:
Price data is accessible to everyone and updated in real time.
Open interest is not calculated.
Tick volume (the number of price changes per unit of time) is used, which indirectly reflects market activity.
The main object of analysis is price.
The Three Principles of Technical Analysis (by Charles Dow)
1. Market movements discount everything
All factors — political, economic, psychological — are already reflected in the price.
Analyzing price history can substitute for analyzing fundamental data.
The market itself shows the most likely direction through charts and indicators.
Criticism:
News can be shocking and unpredictable.
Information does not reach all participants simultaneously.
2. Prices move in trends
Prices are not random — they form trends.
A prevailing trend will continue until it encounters a reversal signal.
Types of trends:
Bullish: prices rise.
Bearish: prices fall.
Sideways (flat): prices fluctuate within a range.
Trader’s task: Identify trends early and exit before they reverse.
Criticism:
There’s no precise definition of when one trend ends and another begins.
The principle is too broad and lacks specifics.
3. History tends to repeat itself
Crowd psychology doesn’t change, so market patterns repeat.
Chart patterns reflect participants’ behavior and allow for forecasting price movements.
Studying past behavior helps anticipate future actions.
Criticism:
Trading methods evolve, making some old patterns less reliable.
There’s no guarantee collective behavior will remain consistent.
Conclusion
Technical analysis provides a statistical evaluation of market behavior and helps forecast prices based on recurring patterns.
It works effectively when there is a representative price history and stable participant behavior in the market.