Technical Analysis in Forex Trading
Basic tenets of technical analysis
Technical analysis is a chart-based approach to study of market trends and is based on the following premises:
- Market prices move up or down in accordance to changes in market’s demand and supply
- Price move in trends that are more likely to continue rather than to reverse
- Market behavior exhibits strong connection to Human psychology
Technical analysis is dealing in the post-movement market patterns.
Timing is absolutely crucial in margin trading especially when on significant leverage and only Technical Analysis provides tools to distinguish entry and exit points.
Fundamental and Technical Analysis
Fundamental analysis examines the pre-movement market whereas Technical analysis is dealing in the post-movement market patterns. Charts and fundamentals are frequently in conflict with each other. Fundamentals often provide an explanation of important market movements only when it’s already too late for the trader to act. The reason is that market price is itself a leading indicator of the fundamentals which leads the rest. Unlike fundamentalists, increased confidence supported by positive experience allows technicians not to wait for the extra confirmation to arrive but enjoy a possibility of entering the trend at the very beginning. Moreover, fundamental analysis alone does not include a study of price action.
Analysis and Timing in Forex Trading
The decision making process consists of two stages – analysis and timing. Timing is absolutely crucial in margin trading especially when on significant leverage. In contrast to analysis when both fundamental and technical approaches can be applied when determining whether the market is under or overvalued, entry and exit points can solely be distinguished by analyzing charts.
Technical Analysis' Flexibility and Adaptibility
One of the biggest advantages the chartist has over the fundamentalist is its flexibility and adaptability that allows switching onto virtually any area or market staging strong tendencies. Technical analysis principles are applicable to different trading mediums. Technicians unlike specialized fundamentalists can trade as successfully in either stocks of futures.
Technical analysis has also proven to be an extremely useful tool when working with bigger timeframes than it is traditionally but mistakenly thought to be limited to.
Futures Markets usually forecast changes in economy and inflation. Rising commodity prices normally suggest growing economy coupled with inflationary pressure wheres falling commodity prices hint at quite the opposite - slowing economy and decreasing inflation. The same way act gold, oil. Even foreign currency futures are able of giving an idea of how do their domestic economies feel like. It is particularly remarkable that trends in futures markets develop long before they are reflected in traditional monthly or quarterly economic indicators.