If you have been involved in foreign exchange trading for any length of time, and whatever Forex trading system you are using, you must have come across the two types of analysis — technical analysis and fundamental analysis. You may well also have noticed that there is a lot of argument between their respecive supporters!.
However, the first thing to emphasize is that the two are not mutually exclusive. The majority of those who are successful in foreign exchange trading make use of both types of analysis.
Technical analysis is a method of predicting price movements and future market trends by using charts to identify what has already happened. It is concerned with actual price movements, not the reasons for them. Fundamental analysis uses more wide-ranging factors such as political or environmental events or anything that could have an effect on currency movements.
Technical analysis is without doubt the easiest and most precise method of foreign exchange trading. It is based on three principles:
- The price of a currency already reflects everything that is known to the market that could affect it.
- Prices move in trends, so analysing the patterns of current behavior is very effective.
- Patterns repeat themselves.
So, whatever Forex trading system you are using, technical analysis can be a very effective way to proceed.
- Technical analysis is completely objective – it focuses on charts and tools and takes no account of feelings or any other less precise factors.
- To decide what the action of a currency pair might be, the actual price is your main concern. You only need to be concerned with what the market is doing, not with what it might do.
- Technical analysis can assist you in the basics of foreign exchange trading – it can help you decide how and when to enter the market, how many lots to trade at any one time, how much money to risk on each trade, etc.
- Technical indicators can sometimes point to the end of a trend before it shows up in the market. This can help you hold on to your profit or minimize your losses.
However, it is important not to look at technical analysis as the be-all and end-all. Those who prefer fundamental analysis point to some of the downsides of technical analysis.
- It can be dangerous to rely totally on the assumption that today’s prices predict future prices. They often do, but not necessarily.
- Relying completely on charts means that you may not pick up signals about the changing of a trend until the change has actually taken place. This means you could miss up to one-third of the fluctuations in foreign exchange trading.
- It is possible in foreign exchange trading to act on a pattern prematurely or in a bit of a panic. If a large number of Forex traders do this, it can create a self-fulfilling prophecy.
One thing is for sure – whatever Forex trading system you are using, you can’t do without technical analysis altogether. Learn how to use it, but don’t let it dictate everything you do. Let it be your servant, not your master, and it will greatly enhance your success in foreign exchange trading.