Technical Analysis In Forex And Why It Is Significant For Traders

Posted on Feb 7 2014 - 7:54pm by Editorial Staff

Money

Forex trading might involve staring at graphs and charts all day but it still requires an understanding of the stock market. You can’t afford to walk into the market uninformed, or the market will punish you for it.

Today, we’re going to take a look at technical analysis. The technical information of the market right now will heavily influence where you place your money and what you get out of it.

Knowledge of how to perform a technical analysis of a market will inform you about the current market situation and how you should react to it. Whilst it’s only a part of your overall decision making process, it will give you the advantage over someone who has no idea about it.

We’re going to explore technical analysis, why it’s so important, and how you should get started.

What is Technical Analysis?

This form of analysis involves looking at the market in isolation. Say you’re working with a popular trading platform like iForex or Yadix. You would begin by looking at what happened before. You have a trade you have confidence in, so you take a look at what this market has been doing for the last day or so.

If it’s been showing a constant upward trend, you might use this information to pull away and look for something that isn’t due to change direction again in the near future.

Every type of technical analysis relies on looking at recent price history. It doesn’t matter if you’re simply looking at trends or comparing resistance levels. It all comes back to looking at the price.

Should You Use it exclusively?

You should never use technical analysis in isolation. Fundamental analysis should also play a part. It influences the market on every level, so it makes no sense to shun using it. Fundamental analysis will focus on political and economic use. We know the market reacts to every small change within the political and economic arenas of the world, so traders must look at it when they make their decisions.

Use both of them together. Arguably, fundamental analysis is even more important because this is what changes the price histories used in technical analysis.

Here are some of the types of fundamental analysis you might use:

  1. New product releases.
  2. Major bankruptcies and profit calls.
  3. Political upheaval potentially interrupting investment in business. 

As you can see, these three examples would have a huge effect on business and currency. Currency is arguably more susceptible to fundamental analysis. The stock market is a measure of the strength of business, so many of the aspects that influence currency trends won’t affect companies on the stock market. Many businesses can continue in isolation.

The issue with the foreign exchange market is currency is directly connected to the government. In the UK and the US, businesses are independent entities with little connection to the activities of the government.

Everyone’s Doing It

If you need any convincing as to why you need to spend some time looking at the graphs and the charts, it’s as simple as knowing pretty much every successful trader does it. They can’t all be wrong, and it’s obviously helping if these profitable traders are experiencing continued success.

Reducing the Gut Reaction

Never go with your gut in the realm of Forex trading, or with any other investment. The gut feeling is entirely based on emotions. Emotional trading never works. This is one of the first things you would have learned with any sort of wager.

The gut reaction can sometimes work, but people who say it does work are deluded. It’s a common delusion caused by the way our minds work. If it works once, we’ll say the gut reaction is reliable, but our minds effectively edit out all the times it didn’t work.

You have to look at the odds. There’s a reason someone betting on a horse race won lots of money on a 10-to-1 shot. For every time they went with their gut reaction and won, their mind edited out the nine times they weren’t successful.

Technical analysis enables you to eliminate this gut reaction by backing your decisions up with facts. Emotional decisions happen when we lack the facts to make an effective decision using logic.

The What and the Why

Someone who has traded in the stock markets for many years before entering the foreign exchange market will have a better chance of success than someone entering trading for the first time. This is because many of the lessons they learn carry over.

Your goal shouldn’t be to make a profit right now. You want to learn from your experiences. One way of learning is to use technical analysis together with fundamental analysis.

The importance of technical analysis is it tells you what happens when a major event happens in the news. You’ll rightly know the actions of the Japanese government have devalued the Japanese Yen significantly. Yet the only reason you know this is because after the news came out you saw the results in your price histories.

Both influence the other. In the opposite direction, you could explain why your investments suddenly dropped by referring to the latest news.

Each event is a lesson learned, and it all contributes to making you a better trader. This is why technical analysis is such an important tool to have.

Where Should You Learn How to Do It?

To get started, go online and start searching for resources on how to perform technical analysis. Feel free to purchase some books, as well. The fundamentals on how to do it will always remain the same. Books provide you with the hard lessons on how to analyse price histories. Online resources tend to have relevant real world examples.

Overall, the best way to become acquainted with technical analysis is through practice. Place some small investments based on the outcomes of your technical analysis. If you don’t have the money to spare, simply make a prediction and watch how the markets react over the coming days.

About the Author
Editorial Staff

Editorial Staff at I2Mag is a team of subject experts led by Karan Chopra.