The Origins of Technical Analysis on the Foreign Exchange Market
The foreign exchange market has become extremely popular throughout the past decade, largely because of the notable financial benefits it represents to investors of all levels and experiences.
There are two primary schools of thought involved in the analysis of the foreign exchange market: fundamental analysis and technical analysis. These schools of thought are described by many as the antithesis of one another, one taking a macro-analytical approach and the other taking a micro-analytical approach.
Technical Analysis Explained
Technical analysis is a highly popular method of analyzing the market that takes a micro-analytical approach to predicting future price movements. It involves carefully analyzing forex charts to ascertain market pricing behaviour of a particular currency pair and establish the current market trend.
Technical analysis involves recognizing patterns and interpreting indicators whilst understanding support and resistance levels. By charting past currency price movements investors can identify patterns, trends, strengths and cycles within market data.
This particular analytical methods has flourished over the course of time, enabling traders to reach informed investment decisions that are based on logic instead of being based on luck. Since its inception in Europe in the 17th century, technical analysis has evolved significantly and is now easy to grasp and even easier to perform.
Technical Analysis: The Origins
The origins of technical analysis date far back to the 17th century, where various aspects of technical analysis can be found in Joseph de la Vega’s analysis of the Dutch stock exchange.
Nevertheless according to sources, technical analysis was properly developed in Asia in the 18th century by Munehisa Homma, a merchant who traded in Japan’s Rice market. Homma is attributed withhaving a major influence on the development of the Japanese candlestick technique, which is a highly popular technical analysis charting tool.
Throughout the 1920s, 1930s and 1940s a number of books were published on technical market analysis by major historical authors such as Richard W. Schabacker, who is considered to be one of the founding fathers of technical analysis. Other renowned authors and economists include Robert D. Edwards and John Magee, whose books remain popular and applicable to the present day.
Other contributions from major pioneers such as Charles Dow, John Maynard Keynes and William Gann impacted significantly upon the popularity of technical analysis. Their work focused on the power of price in influencing market forces, suggesting that the repetition of previous trends gives major clues of current and future behaviour.
As foreign exchange trading exploded in popularity, so too did the material available to analyze the market. During the 1960s countless books and journals were published outlining how to read charts and generate profits, as more and more economists focused their attentions on the power of chart analysis.
Technical Analysis in the Modern Age
Although many of these books were written with the stock exchange in mind, they remain applicable to the foreign exchange market to this day, since the ability to perform technical analysis is universal across all financial markets. Since their release these books remain timeless and have since generated a huge following of traders who have stayed faithful to the power and effectiveness of forex technical analysis.
Since the 17th and 18th Century countless technical terms and jargon have entered the trading scene. There are also endless tools and techniques adopted by technical traders including forex indicators, which come in many varieties. Some indicators analyze mathematical price movements while others focus more on the relationships and correlations between price changes.
Many technicians use a combination of techniques to develop a market analysis approach that suits them. The goal of technical analysis is to accurately forecast future price movements by establishing market trends.
Ultimately, by successfully analyzing the market a trader is more likely to generate a successful trade and thus make a positive return on investment. It is for this reason that traders from all walks of life continue to choose technical analysis to observe the market and anticipate currency price movements.