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lesson number
25

4. Technical analysis

4.1. The destination and fundamentals of technical analysis

Technical analysis is used for the prediction of market movements (that is alterations in
currencies prices, volumes and open interests) outgoing from the information obtained for the
past. The main instruments of technical analysis are different kinds of charts, which represent
currencies price change during a certain time preceding exchange deals, as well as technical
indicators. The latter are obtained as a result of the mathematical processing of averaging and
other characteristics of price movements. The instruments of technical analysis are universal and
applicable to any Forex sector, any currency and any time span.

Technical analysis is easy to compute what is important while the technical services are becoming
increasingly sophisticated and reasonably priced. They are available to all Forex participants
independent of their trade plans, strategies applied and the time of position continuance.

Dow Theory

The fundamental principles of technical analysis are based on the Dow Theory with the following
main thesis:

1. The price is a comprehensive reflection of all the market forces. At any given time, all
market information and forces are reflected in the currency prices ("The market knows
everything").

2. Price movements are trend followers ("Trend is your friend"); trends are classified as
up trends (bullish), downtrends (bearish) and flat (sideways). Examples of mentioned
trends are given on Figures 4.1 - 4.3.

3. Price movements are historically repetitive ("The history repeats") which results in the
same patterns periodically emerging on the charts.

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