Forex Education: Why Do Traders Use Technical Analysis?

Forex Education:  Why Do Traders Use Technical Analysis?

Many traders are skeptical at first when the prospect of technical analysis is presented.  A common argument that is made is generally seen when people suggest that economic factors must be considered, as well as world news and political events.  Technical analysis practitioners generally avoid these issues and focus solely on price activity and chart behavior.  Which method is best?  Is it actually possible to forecast future forex prices without focusing on the underlying economic fundamentals?    

“One of the main factors that technicians use price information to do is to identify exit and entry points for trades,” said Haris Constantinou, currency analyst at TeleTrade, “and this is something that can be done much more easily when using charts when compared to trading strategies that implement macro economics and news events.”  Technicians are also able to identify momentum direction more easily and this allows trends to be seen with a greater level of clarity.  Technical strategies can be used to maximize profitability and to minimize risk in ways that can be very difficult for traders that implement fundamental strategies.

Is it Difficult to Learn Technical Analysis?

Successful practitioners of technical analysis will often say that technical analysis is something that can be learned relatively quickly.  And if it is approached with conservative logic and consistent behaviors, long term gains can be realized.  The fact is that technical analysis is not an overly difficult discipline to master.  What tends to be most difficult is attaining the ability to control emotions, greed, and other psychological responses when losses are seen and negative streaks occur.       

But there is work involved as well.  In order to be a successful chart technician, you will have to spend time studying different chart types (different time frames, such as 5 minute, 1 hour, and daily charts), and looking at the ways different technical indicators work in each type of market situation.  It is always a good idea to trade using a demo account before any real money is committed so that different trading strategies can be used and tested for accuracy. 

Great advances in computer software and internet connectivity have made studying these things much easier, so it should be remembered that even if learning these things seems difficult, it is easier now than it has ever been in the past.  At this stage, all of the major forex brokers offer free charting software that will offer access (and demo accounts) that will allow you to test out a variety of different chart indicators and pricing time frames.  It might sound cliché, but practice (and time effort) does make perfect, and there is no substitute for this in forex trading.