Since Forex technical analysis focuses on the changes that are seen in various price movements, it can be said that technical forex trading boils down the process of investment into its simplest form. “If price activity meets the definition of what makes a trend or potential reversal technical analysis in Forex trading can give traders an idea of how to trade current market activity and to make forecasts about what will likely happen next.”, said Haris Constantinou, currency analyst at TeleTrade.
In addition to this, technical analysis can give traders an idea of when not to trade. While this might seem like a contradiction, it can be one of the key features in knowing when price signals are not lining up in an optimal fashion or falling into high probability trading scenarios. Knowing when not to trade will help greatly in improving your profit and loss ratios. This will you to stay in the forex trading game for the long term, and help you to avoid some of the drastic losses often experienced by new forex traders.
Making Market Information Manageable
Computer trading has made it possible to analyze market volumes and general momentum in ways that were not possible years past and this can be done with a simple look at your trading charts. In addition to this, we all know that the forex markets involve a large number of currency pairs that can be traded at any time. Because of this, suitable trading entries can be identified if enough currency pairs are monitored. For this reason, most forex traders recommend that you watch a wide number of currencies so that new position entries are not missed.
Technical analysis has some basic tenets that have been widely researched and used successfully by many traders over the long term. Once of the most commonly understood assumptions is that history (and price activity) tends to repeat itself in predictable ways. While this does not mean that these repetitions will be true 100% of the time, it does mean that monitoring historical price action can give traders an edge in determining high probability forecasts and trading options that would not otherwise be noticeable. Focusing on price-action and chart patterns can help traders to focus on what really matters (the exact price levels themselves) and to isolate probabilities so that only the trades with the highest likelihood of success can be taken.
So, it should be understood that some of the primary advantages of technical analysis in forex trading is the fact that these methods will help traders identify opportunities that will often be missed by those focusing solely on fundamental analysis. While there is certainly nothing wrong with using economic data as a basis for long and short positions, it would also be a mistake to completely disregard the immense benefits that chart based trading can offer.
While trading patterns can seem complicated and difficult to identify, some very common formations can be used for daily trading. Some of the most well-known names include head-and-shoulders patterns, double-top and triple tops (and bottoms), triangle patterns (ascending, descending, and symmetrical), and all of these have proven, over time, to give traders an edge when looking for enhanced gains because of their strong predictive sources.
But perhaps the key benefit to technical analysis trading is that these patterns would be virtually impossible to identify without using price charts. Since charting is free in most cases, and quickly accomplished, there is very little reason to avoid tapping into the discipline’s predictive power. But for some reason, many traders fail to understand that conventional trading methods can be enhanced in ways that dramatically increase overall profitability. It can become very easy to fall into a standard routine and standard conventions.
But since new and improved technology has removed the difficulty of performing difficult mathematical calculations, and since many internet sites offer technical indicator software that can be inputted into your trading station, there is essentially no excuse for not using these tools, testing them in various forms, and implementing them in ways that heighten our trading results in ways that were not previously possible.
A final point on the benefits of technical analysis can be seen in the fact that technical analysis takes a lot less time to conduct and research than fundamental analysis. While some might view technical analysis with skepticism because of this, there is a large amount of broker data that show the success of technical strategies being just as profitable as fundamental strategies – but with less time and effort spent on a daily basis.
Price charts can, literally, provide a wealth of trading information in a very small amount of time. Traders are quickly able to identify trends and latch their trades onto those trends. Levels that mark significant areas of support and resistance can be seen at a glance. Volatility levels, momentum levels, momentum direction, and pricing patterns are some of the key pieces on information that are available to technicians (and not as readily available to fundamental traders). These key benefits will give you an edge when you are looking to step up your game as a trader and will allow you to see markets events that are not visible to all participants.
It should always be remembered that your pricing charts are telling you a story, not just about where a currency has been but in where it is going as well. Pricing charts will enable you to see market activity in its purest sense. But at the same time, pricing charts can give you a more complicated and deeper insight into markets as well, and in the following sections we will look at some of the ways technicians can enhance their trading using methods and research pieces that have been shown to increase profitability over the longer term.