Technical analysis is a method to predict movements of price and trends of the futures market by studying the past using charts. This form of analysis is related to what has actually happened in the market and not what should be happening. The process of technical analysis takes into account the price of instruments and trading volume besides being all about creation of charts from that data as a primary tool.
The analysis is based on three principles that are as follows:
Market action discounts all: The statement means that the actual price is a reflection of everything that is known to the market that could affect it and include fundamentals such as inflation, market sentiment, and political factors.
History repeats itself: The recognized and categorized forex chart patterns and their repetition in the past support the belief that human psychology changes little over time. It is assumed that patterns will continue to work well into the future just as they did well in the past.
Price move in trends: It is a widely believed fact that market behavior patterns have a high probability of producing the expected results and there are many recognized patterns that repeat themselves on a sustaining basis.
One of the major advantages of technical analysis is that experienced analysts can easily follow many markets and instruments on a simultaneous basis. Moreover, this form of analysis is useful for projecting movements of assets that are available for trading in the capital market. In addition to that, technical analysis is valid at any price level and concentrates on prices that neutralize external factors.