The principle behind technical analysis is that markets repeat theselves. Followers of this method of analysis believe that certain formations and trends can be identified in the markets. These repeating market events are identified by the study of chart patterns and specific market indicators. This is the central theory behind technical analysis. That previous market actions and patterns will repeat in the market in the future.
Therefore in technical analysis there is no room for randomness. This approach is very different from that taken by fundamental analysts. Fundamental analysts instead view the market as efficient and driven by economic news flow.Market news flow and economic releases are seen as the determinant of the markets price at any single point in time.
If it doesn’t work, why do Forex traders use it?
Critics of Forex technical analysis have often questioned its validity. However from studying past chart formations, repetition of market events can be clearly seen. Any study shows that they do this on a regular basis. Therefore the question instead should be if technical analysis works frequently enough to profit rather than if it works at all.
It is widely excepted that technical analysis can work some of the time and this is why so many traders will generally follow some school of it. With many traders reacting to specific points in the market it is often said asserted that traders themselves help to make technical analysis a self fulfilling prophecy.
Trading with Forex Technical Analysis
What it is important to remember as a trader is that the technical approach followed will need to provide us with more instances of repetition than uniqueness.It is also important that the profits won from following any technical indicator will be sufficient to cover the losses accumulated when the analysis is wrong.
Many different schools of technical analysis exist. These are not just confined to Forex trading. Some of the most common technical methods followed include Elliot Wave theory, Candlestick charting and Fibonacci analysis. With so many schools of thought available it becomes evident that no one particular method will work all the time . If this was true then only one technical method would be required.
Even though no single school of technical analysis is 100% accurate you can still use technical analysis to profit from your trading. The secret here is to combine approaches to add the greatest validity to your trading system. By seeking this additional confirmation you will help to increase the accuracy of your trading and ultimately your profits.
Any successful trading approach should make use of more than one form of trade validation .It is recommended that when applying a technical approach you should also reference the market fundamentals. Forex technical analysis and fundamental analysis should not be seen as either or approaches. While their approaches might be quite different, by combining the two not only will your trading decisions have increased validity they will also end up more profitable too.
