Introduction to technical analysis

In case of the OFS Trading System at the beginning we only apply technical analysis. This form of analyzing is not only the easiest way to handle, but technical analysis also perfectly suits a forex trading system with clearly defined rules. In this article you’ll going to learn what technical analysis is all about.

The definition of technical analysis:

Technical analysis means that a forex trader is speculating how the prices are going to develop based on their development in the past. By means of charts recognizable patterns from the past are being studied to be able to speculate about the way the prices will be going to develop in the future.

Reproducing human emotions on a chart

In case of a technical analysis a forex trader actually is studying human emotions reproduced on a chart. Mostly it so happens that forex traders use to act based on emotions like fear, greed, and hope and by means of familiar patterns this is obviously also revealed on a forex chart.

Characteristic for these patterns is, that they are almost continuously visible on a chart. Human emotions hardly change throughout the years en that’s the reason why these patterns are in a general sense very accurate.

The Dow Theory

Technical analysis’s are based on the Dow Theory, which contains three important issues:

  • All information has already been incorporated in the price, in everybody’s knowledge, including the fundamental aspects.
  • Price development isn’t arbitrary. Although there certainly are periods of random price development, it’s commonly usual that it is a question of a trend. The purpose of a forex trader is to discover whether it really is a question of a trend and consequently to apply this trend.
  • The “what” or “where” question is more important than the “why” question. In case of technical analysis’s the main issue is the current price as well as the price development in the past. The answer to the question why the current price is on a certain level at this very moment, is limited to the fundamental analysts.

Technical indicators

Technical analysis’s are always performed by means of graphs, also called charts. It so happens that on this chart the price development is clearly reproduced and based on this forex traders are quite easily able to discover patterns and important price levels.

Nowadays a forex trader has also all kinds of handy means at his disposal to be able to perform technical analysis’s. These means are also called technical indicators.

Although technical indicators can certainly be handy as means of support, there’s also a risk involved in this. Many forex traders are making the mistake to take decisions exclusively based on technical indicators, which means that a technical indicator isn’t an aid anymore, but has become the only decisive factor. In that case forex traders are inclined to forget what forex trading is actually about, which should be price action.

That’s the main reason why we, while employing the OFS Trading System, reject the application of all kinds of complicated technical indicators. In case of the OFS Trading System the emphasis is aimed at price action.

Anyway it’s not my intention to stress that using technical indicators is always wrong, but one should be aware not to overestimate their value.

Conclusion

You now have obtained a global view of the meaning of technical analysis. In the next article you’ll learn which kinds of charts are available and the advantages and disadvantages of each individual forex chart.

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