Some of the crucial questions being asked by Forex traders include "Is the market over priced?" "Which levels are the good entry points?"
Trading would become much easier, if one would know the answers to such questions. Though an accurate forecast of future prices is a difficult task, technical analysis makes it simpler to handle.
Technical analysis includes the study of chart patterns, candlesticks, moving averages, and other indicators. It is easy to apply in any market, in which the the raw data (prices and volume) is available. With the help of technical analysis, it is easy to understand the sentiments (psychology) of the market and to forecast the prices, without looking at the fundamental factors of a particular currency.
Scope and Advantages
Technical analysis is widely used by forex, equity, and commodity traders, to determine the short term as well as the long term trends of the market. The scope of technical analysis is increasing every day, as more and more people are trying to learn the skills of technical analysis to earn good returns.
Main Advantages of Technical Analysis
Trend Analysis:The biggest advantage of technical analysis is that is helps investors and traders predict the trend of the market. Up trend, downtrend, and sideways moves of the market are easy to predict, with the help of chart analysis.
Entry/Exit Point– Timing plays an important role in trading and investing. With the help of technical analysis, traders and investors can predict the right time to enter and exit a trade thereby enabling good returns. Chart patterns, candlesticks, moving averages, Elliot wave analysis, and other indicators are very useful for traders to make entry and exit points.
Provides Early SignalTechnical analysis gives early signals and also paints a picture about the psychology of investors and traders regarding what they are doing. Price-volume analysis also indicates the movement of market makers and their activities related to a particular market. Another main advantage of technical analysis is that it gives an early signal when it comes to trend reversal.
Quick and Less Expensive– In currency trading, technical analysis is less expensive as compared to the fundamental analysis and there are so many companies that provide free charting software. Technical analysis gives a quick result for traders who use 1 minute, 5 minutes, 30 minutes, and 1 hour charts. For instance, the formation of a head and shoulder on 1 minute and 5 minutes chart gives fast results, as compared to the daily chart.
Provides Lots of Information– Technical analysis is helpful for short term trading, swing trading, and long term investing. Technical charts provide a lot of information that helps the traders and investors build their positions and take trades. Information like support, resistance, chart pattern, momentum of the market, volatility, and trader’s psychology are just some examples of types of information provided by technical analysis and used by traders in the Forex market.
In technical analysis, there is an ample amount of opportunity for those who know how to read charts and how to take actions (buy/sell) by looking at the charts. Trend analysis, right time to enter and exit, and early trade signals are the biggest advantages of technical analysis, which should motivate all Forex players to learn about it and begin using this effective tool.