There is a wealth of empirical evidence to suggest that markets (foreign exchange included) tends to repeat certain patterns, so technical analysts, spend a lot of time looking at charts, and trying to predict how a currency pair will move based on recent activity in the cross.

The basic theory behind technical analysis is that you can get a lot of information about an asset class or currency pair by looking at the price. All the information about the asset is defined by how much people are willing to pay for it, so technicians spend a lot of time looking at price charts for clues about what will happen next.

They argue that human nature is repetitive, so that when you put a large number of people together ie: the market, certain repetitive patterns are produced, and these can be traded on.

Charts

The primary way of conducting technical analysis is through charts. Charts illustrate the psychological makeup of the market, and from them, technical analysts can divine much about the future of the asset even through some very basic tools. Indeed some simple technical analysis can be done by drawing simple lines on a chart and using a bit of intuition.

There are more complex mathematical means of looking at charts which many advanced traders will also use.

The most popular chart in the industry is the Japanese candlestick chart which offers more information about an asset class than more conventional line charts. There are too many trades happening at one time for a simple line chart to be useful, so Japanese candlesticks seek to relate only the most important information which a trader needs to know.

Here is how candlesticks work:

The thin line is called the shadow, where the peak of the line is the high price, and the bottom on the line in the low price for a given time period. The box is referred to as the real body, where the top and bottom parts of the box represent the opens and closes for a specific time period.

When the opening price is above the close, the candle is dark or red, meaning that the asset lost value over the specified time period. When the close is above the open, candle is blank or green, representing an appreciation in the price.

By showing the high, low, open and close during each time period, a candlestick offers all the pertinent information a trader needs to know.

Basic Technical Techniques

Thanks to technological advances, even some of the most complex technical analysis has become easily accessible to virtually every trader. Moving averages, stochastics, Fibonacci retracements, and the RSI (Relative Strength Index) are some of the more common mathematic methods, but at the end of the day, a great deal of technical analysis is intuitive.

As an example, if we take a chart which is rising from the lower left corner of the screen to the top right, and draw a line touching off all the lows, we have a simple rising trend line, one of the most common technical tools in the industry.

If the line breaks, it's a signal that the rising trend is breaking down, and you may want to consider selling the asset.
Conversely, if the price bounces off the trendline, moving higher, the trend is solidified and confirmed.

Technicians also pay close attention to key levels in a chart known as “support” and “resistance”.

See how in this chart the currency appears to be bouncing off the 1.112 level? This is called a support level, which suggests that there are a lot of buyers willing to buy this pair at that level.

What happens when this support is broken? Logically, it means that it is now easier for the pair to move lower.

Likewise, resistance is the opposite of support, whereby a pair is reluctant to move above a certain threshold.

Understanding these very basic concepts can be extremely useful for anyone looking to trade foreign exchange, and are the basis for a large amount of the trading which takes place on a day to day basis.