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Basics of Technical Analysis

Basics of technical analysis helps to basically understand employment of price chart (and results of its math interpretation) for further market and price forecast. Technical analysis rests upon repeated nature of market and implies that ups and downs of currency quotations on charts are rotated according to certain time periods.

A founder of modern technical analysis is an analyst named Charles Dow. As early as in the beginning of 20th century he formulated its main principles and propositions that are still relevant. Three main propositions of such are distinguished: circumstances

Technical analysis contains three main propositions:

  1. Price accounts for everything. It means that any event (political, economic) which could affect price behavior is already accounted by market and is reflected on the price chart. This proposition means that all factors impacting the price will be definitely reflected in its behavior, therefore, it is required to monitor quote graph.
  2. Price movement is subject to tendencies. As a rule, price behavior is not spontaneous and casual but represents a certain tendency or trend. Recognition of these tendencies is just the point of technical analysis. Famous analyst Charles Dow described his method allowing to recognize upward or downward tendency as follows: under “bull” trend every subsequent maximum or minimum of price will be above the previous one, whereas under “bear” trend it is quite the opposite. Trends were named “bull” and “bear” by analogy with nature behavior of animals: bears attack their enemies with paws by top-down movement, so downward trend is called “bear”, whereas bulls, on the contrary, try to pick their victim with horn and lift, therefore upward trend is called “bull”.
  3. Market history tend to repeat. Behavior of market price is closely intertwined with human psychology. All graphical methods, which had been designed for the last hundred of years and successfully employed in Forex market will also be applied further. The reasons is that ground for those methods is human psychology which hardly will change in future.

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