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The Use of Technical Analysis for Forex Traders

Currencies / Forex Trading May 17, 2019 - 03:24 PM GMT

By: Submissions

Currencies

In forex trading, a trader should always carry out analysis to determine the ideal time to enter or exit from trade through the identification of price targets and price trends that depend on historical price movements. All these are summed up to two words which are technical analysis (TA). The analysis functions by analyzing statistical trends based on trading activity such as volume and price movement. Most people tend to mix up this analysis with the fundamental analysis. Just to clarify, fundamental analysis primarily deals with evaluating security’s intrinsic value while technical analysis focuses on trading signals, patterns of price movements, and analytical charting tools for evaluation of security’s strength or weakness.


Understanding TA

This type of market analysis involves studying historical price action so that a trader can identify patterns and probabilities of future price movements in the market. As you can see, this analysis boils down to two main things, which are;

  • Identification of trends
  • Identification of resistance or support through the use of price charts and timeframes

Nonetheless, forex market's price and trends will always do three things; move up, move sideways, and move down.  Therefore, with technical analysis trading, a trader can determine the range – when the prices move zigzag sideways and trend.

Assumptions

Charles Dow in the late 1800s first introduced TA. As part of understanding this theory and TA in general, it is essential to understand the assumptions behind this theory. The assumptions include;

  • The market discounts everything
  • History in the forex market tends to repeat itself
  • Price moves in trend

Why and how to use this analysis

TA is essential as it not only helps you to determine where and when to enter a market but also helps you to know at what point to get out of a market.

The forex market is not simple to analyze. It's because they are influenced and impacted by several factors such as fiscal policies delivered by governments, monetary policies from central banks, and various internal economic factors. When analyzing these factors, it is easy for a trader who has limited time and focuses on making errors.

Fortunately, there is a way that traders can use to avoid such errors. That is by focusing on one piece of data that is price movement; of course, through TA. Additionally, through TA traders can get offered;

  • A way of judging whether their analytical chart is perfect for trading or not
  • A means of finding potential trade setups
  • A way of looking for potential trade setups
  • A means of managing the found potential trade setups

TA and decision making

Forex trading involves making several decisions. Such decisions include when to buy and sell and what to trade. For any trader to make these decisions, he or she has to make opinions about what he or she thinks about the price of a particular asset or stock. All these decisions are fulfilled by practicing technical analysis trading.
In decision making, technical analysis trading can be used for the following;

  • As a source of confirmation – Traders can use multiple indicators to gather information which can be used to signal valid trade.
  • To help in identifying or confirming sell and buy signals – This is achieved by the use of tools, patterns, and indicators to visually view potential buy or sell signals.

TA and Short-term traders

Short-term forex traders are more likely to use technical analysis compared to long-term forex traders. It's because short-term traders are often in and out of a position before any changes in fundamental data take place. Moreover, long-term traders can also use TA to help them in locating and confirming potential trading opportunities.

Conclusion

In the forex market, patterns are a key concept. Additionally, the existence of market trends is vital to any technical trader. Despite, the criticism from several academic articles, technical analysis is vital in analyzing charts in forex markets and identifying patterns. Therefore, as a trader add it to your analysis package and enjoy the benefits.

By Andrew Ma

© 2019 Copyright Andrew Ma - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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