Technical analysis is used by forex traders to identify the market's trends as well as price levels which have a high probability of rebound such as support and resistance levels. It helps traders identify trading signals (in terms of entry and exit points) in the foreign exchange market. The technical analyst studies the history of the evolution of an asset using a graph. He identifies the key zones of financial markets where buyers and sellers meet.
To proceed with a proper chart analysis, a forex trader looks for confluence between several indicators. In order to do this, traders have various tools at their disposal: technical indicators, trend lines, support/resistance levels, chart patterns, and, of course, the most important tool of all, a graphical history of forex prices.
Technical analysis is primarily based on the fact that certain market configurations are cyclical and that price action repeats itself over time. Unlike fundamental analysis, which studies economic factors and long-term trends, technical analysis is the method most used by forex traders to predict the price movements of currencies in the short term. For this reason, it is recommended that traders use technical analysis to trade spot forex and CFDs. Traders can analyze charts using different time frames depending on their investment horizon. Japanese candlestick charts are the most popular with analysts (see chart types).
Between 25 and 30% of forex traders only use technical analysis to find their trading signals. However, most traders consider fundamental and technical analysis to be complementary.
The forex market is a highly trend-driven market, concepts such as trends and support/resistance levels are therefore particularly important.