Technical analysis looks at historical price charts of a currency pair and the trends that occur within these charts.
Forex Broker charting software allows you to look at large volumes of past data for trends and patterns in order to find some great trading opportunities.
You can take a look at historical price movements and try to determine future price movements, acting upon the assumption that history tends to repeat itself. These prophecies however, are often are self-fulfilling, as more and more traders look for certain price levels and chart patterns, and this in turn causes these patterns to manifest themselves in the markets.
There are many types of charts, but the most frequently used in Forex market analysis are line charts and the candlestick charts.
A line chart for a currency pair simply plots the closing points at selected intervals with a line draw to connect the points. So for example, a five minute line chart will put a plot every five minutes and connect all the plot points.
Now if the interval was changed to a longer period, say one day, the line chart would plot the daily closing points of a currency pair. This then provides a longer term view of how a forex pair has traded.
Where the line chart only provides the closing points within selected intervals, the candlestick chart provides a lot more information.
A candlestick chart is a one made up of separate blocks or candles. Each block (the body of the candle) represents a time interval, e.g. 5 minutes, 1 hour, 1 day, 1 year, etc.
If the closing price is higher than the opening price, within the selected time interval, then the block’s color is green; otherwise it’s red. The thin line coming out of the top of each block indicates the highest price of the time period, and the line coming out of the bottom indicates the lowest price of the time period. These thin lines are called shadows or tails.