The history of the price of an asset is used to predict the future price of that asset when trading with the help of technical analysis. The foreign exchange market is the largest market in the world with more than $4 trillion in daily trades; therefore it is an ideal market to analyze using technical analysis. The more data used, makes the predictions based on technical analysis more accurate, making trades more successful. Although forex is often referred to as the ideal market for technical analysis, this trading strategy can be used as well as on commodities, indices and stocks.
The price history is shown visually on a chart. Various tools including trend identification and multiple indicators are also used to predict the future position of the asset.
It is of utmost importance to try and determine if an asset is in a trend i.e. constantly moving in a certain direction. In order to determine the trend, lines are drawn to connect important historical price points. These lines will enable the trader to see where the asset price has been unable to move either higher or lower. The above areas are called resistance and the lower ones are called support and they assist the trader to determine where the trend began, where and when it will continue and when and at what price it will end.
Many traders utilize indicators together with resistance and support in order to determine the future direction of the price of an asset. Hundreds of indicators exist in the market and it is important that the trader knows how to work with the specific indicator before putting it into use in his trading strategy.