Forex (also known as currency exchange or fx) technical analysis, a widely used method in currency trading around the world, is based on three essential principles. The first principle is that the fx market promotion gives everything a discount. The actual market price is a reflection of everything the market is aware of and may have an effect on the price movement. The purely technical analyst only deals with price movements and not with the reasons for any changes.
Second, prices move in trends. Price can move in 3 directions, i.e. they can move up, down or sideways. Once a trend in one of these directions is in force, it will usually persist and create a trend. Technical analysis is also used to identify market behavior patterns that have long been recognized as important. These patterns usually behave in the same way as in the past, as long as you can recognize and format what they are. They have proven to be consistent in predicting future movements. If you can correctly identify the chart patterns and what the next price movement is, you can limit your losses and maximize your profit.
And thirdly, history repeats itself. Technical analysts believe that investors collectively repeat the patterns of their investment behavior. They tend to act in the same way and respond to different types of incentives, such as economic data or other news. Because investor behavior is repeated so often, it is possible to identify recognizable market patterns for analysis.
Therefore, a trader who is a purely technical analyst would not worry about market news. He would use the chart patterns because the market has taken the news into account and acted accordingly. Although widely used, there are some drawbacks to this trading method.