In this article, we will go into more detail on the many advantages of forex technical analysis, without forgetting to mention the few disadvantages as well.
Advantages of Forex Analysis
- Advantages of Forex Analysis
- The Disadvantages of Forex Analysis
Let’s start by looking at the different advantages of forex technical analysis.
Technical Analysis is Quick and Easy to Learn
For beginners, technical analysis can seem complicated. But those who take a few minutes to dig a little deeper into the matter quickly find that it is very easy to learn the basics of technical analysis. It only takes a few hours to learn the basics of trading training. And in a few days of studious work, you will know enough to build your own trading methods on your own. Of course, you will then need to evaluate, test, and improve them on a demo trading account before implementing them on a real account. Keep in mind that, in the end, learning to trade is all about learning technical analysis.
Allows Understanding of Market Psychology
Technical analysis guides to understand investors’ psychology and traders regarding the market and helps to understand what they can do. It allows you to detect periods of euphoria, as well as periods of fear, which helps to know which way to position yourself.
Allows to Identify and Analyze Trends
Helping traders and investors predict the future of the market based on this analysis and making investment decisions is the integral advantage of technical analysis. There are generally three possible trends in the market, namely uptrend, downtrend, ranging markets, and sideways trend. They can be easily identified and exploited with technical analysis.
Lets Know When To Buy and When To Sell Forex
When it comes to trading and investing , time plays an important role. The right time to be in the market is easily predicted through technical analysis that achieves good returns. Chart patterns, candlestick patterns, Dow Theory, Elliott Wave Theory, and various indicators are extremely helpful for investors and traders when they enter and exit from the market.
Forex Technical Analysis Can Be Performed Across Any Time Frame
Technical analysis is useful for both traders and long-term investors. Indeed, the analysis remains the same whatever the horizon, only the period of the graph changes. The detailed information received from the technical charts helps both of them to take a rational position in the market. So whether you are a short-term trader or want to invest in forex for the long term, it is a must to use technical analysis in your forex trading decisions.
The Disadvantages of Forex Analysis
Let us now continue with the few weak points of forex technical analysis.
Past Market Behavior Does Not Guarantee Its Future Behavior
All technical analysis methods are based on data from the past and draw conclusions for the future. However, past events can never be a 100% guarantee of what will happen next. This is the fundamental flaw in technical analysis. Moreover, even with the highest probabilities, any indicator is always behind compared to the present moment. However, the market is constantly changing and never waits.
So there is a lag between when an indicator decides what to reflect in the chart, and then when a trader decides what to do with that signal. In the meantime, it is possible that market conditions have changed and the interpretation that seemed right a while ago eventually becomes obsolete.
Risk of Over-Analysis
There are many, many graphs and technical indicators out there, and this can be confusing. Some traders believe that the more indicators they use, the more reliable their forex technical analysis will be. This is generally totally wrong. Indeed, the indicators very often contradict each other. Thus, using several simultaneously can confuse even a seasoned investor. In addition, to judiciously choose the indicator most suited to a situation, it is necessary to already have a certain degree of competence.
Some Factors Ignored
Technical analysis uses calculations and extrapolations but does not take into account all factors. It does not define market sentiment as effectively as some experienced observers can. Sometimes a hunch can be the only way to see events and judge where the trend is going next. A human factor can therefore turn in favor of the trader under certain conditions. Experience and staying informed are key. Likewise, the technical analysis of the financial markets does not take into account all the economic factors which can sometimes violently vary the price of forex currencies.
Lack of Scientific Objectivity
Although some theories offer some objectivity to analysis, other studies do not necessarily lead to an objective interpretation. This is why technical analysis is sometimes considered to be more of an art than a science. This is also where individual and mass biases come into play. There is, by the way, a theory about the self-fulfilling prophecy of technical analysis forex.
It refers to the fact that the more people approach the markets with methods of technical analysis of financial markets, the more likely the evolution predicted by forex technical analysis is. Indeed, if everyone observes the same buy signal at the same time and acts accordingly, the market will inevitably go up. However, the fact that traders operate with different time horizons, expectations and risk profiles makes it difficult to find a common approach to self-fulfilling prophecy.
READ MORE: Forex Technical Analysis 101