Using Technical Analysis In Forex Trading

Technical Analysis involves analyzing charts and diagrams to understand price and/or movement of a currency pair in the past in order to predict the future. This analysis is based on three principles:

1. It aptly considers that there are many other reasons for the forex market movement besides the movement of a currency pair’s price. The price of a currency pair will also depend on fundamental factors, such as inflation and interest rates, supply and demand, and political factors.

2. It is based on the notion that the forex market moves in well-defined predictable patterns. Technical analysis dwells on these predictable patterns.

3. The existence of patterns that repeat themselves over a period of time is the essence of technical analysis.

Disadvantages of Technical Analysis

1. Some critics believe that the whole approach of technical analysis, that future prices depend on the current day’s prices, is quite wrong.

2. Some claim that technical analysis provides delayed signals regarding changing forex trends, therefore traders lose the opportunity of earning from about one-third of the fluctuations.

3. Short-term technical analysis is incapable of predicting the direction of the forex market.

Advantages of Technical Analysis

1. Other than the forex market, technical analysis can also be used for forecasting price and/or movement of any capital market tradable asset whose price is determined by demand and supply factors.

2. It focuses on analysis tools and methods for decision-making in the forex market and minimizes or removes dependence on emotional clutter on the trading desk.

3. It points towards the lasting or ending forex trends in the market, which is information a trader can make profits or minimize losses.