What Information Can be Gained from Price Charts?

What Information Can be Gained from Price Charts?

When many new traders hear about the practice of technical analysis in forex trading, skepticism is one of the first (and most natural) responses:  How can we possibly know where forex prices will move in the future by simply looking at past price activity?  This question is highly valid, and even more important when we consider that many technical analysts will argue that we do not even need to know the identity  of the underlying asset in order to determine what is likely to happen next in market valuations.  But the fact remains -- technical analysis is widely used and has been a profitable approach for a large number of forex traders.  So, what exactly do price charts tell us?  How can what happened in the past help us to predict the market’s future?

Using the Past to Predict the Future

“The information that can be seen in price charts is very valuable in that it can help forecast -- to a certain level of probability -- the future price movement of a forex currency pair,” ,” said Rick Bartlett, currency analyst at CornerTrader“Chart analysts tend to believe that price graphs tell the true story of a currency pair.”  Previous price behavior can be taken in combination with the more than 50technical indicators that are currently available, and this allows traders to get an objective sense of overall momentum in a currency.  This information is key when we are looking to determine when a trend is just beginning or might actually be coming to an end.

In the forex markets, technical chart analysis (like most intellectual disciplines) has its own set of jargon that must be understood in order to be able to understand published articles or descriptions of trading strategies.  Because of this, it is always a good idea to maintain access to a forex glossary, so that these terms (and their associated strategies) can be understood.  The modern trading environment is a very diverse and ever changing place, so while the basics can be covered rather quickly, a constant approach to learning must be undertaken in order to understand what is happening in the markets on a regular basis. 

Markets Often Repeat Themselves

But perhaps the main reason technical analysis works for many people is the fact that markets tend to repeat themselves.  If in the past the majority of investors through a particular currency was excessively cheap at a certain price level, it is highly probably traders will buy that currency if that price level is seen again.  The same logic holds true when a currency becomes excessively expensive.  So, rather than looking at charts as simply graphic images, it is better to look at them in terms of the information they really give us:  Price charts are a road map for human behavior.  This information can be used to gain an edge on the rest of the market, and to identify trading opportunities at their earliest stages.