Forex is the largest and most
liquid market of the world. Large banks, hedge funds and so many people from
around the world trade every day in Forex. They need some tools to analyze and
compare the movement of the currency they want to buy or sell. In such
situation technical analysis and technical indicators come to their use.
Technical analyses include many methods for predicting the movement of currency
but the basic things is its past movements. Based on the historical movement of
a currency, technical indicators depict the data about it in different forms.
Bollinger bands, Stochastics,
moving averages, Fibonnaci retracement and MACD are some of the most popular
technical indicators used in Forex. Trend lines or support and resistance graph
are also very helpful in observing good amount of information about a currency.
Traders can use these indicators to predict whether a currency is moving
upwards, downwards or is range bound. If the trend lines are moving in a
particular direction or forming some pattern, the trader can predict the value
of currency in future. If the value of a
currency seems to be oscillating in a particular range, support and resistance
lines can help the trader in understanding the possible inclination of
currency.
There are many advantages of
technical analysis like, it makes trends easy to identify, it is focused on
movement, pattern tracking becomes simple and at the same time it is quick and
inexpensive. Technical analysis helps to represent large amount of data in a
simpler graphical representation which not only saves time but is easy to
comprehend. In Forex, these inputs play a crucial role in making intelligent
trading plans and making huge profits or at least it
prevents traders from committing blunders.
With all the advantages of
technical analysis to avail, some traders still end up losing money while
others make huge profits. This is due to different interpretations of same
technical indicators by different people. A buyer or a seller can interpret
same data in different ways to suit their interest. SO it can be said that
technical analysis also has some limitations.
The basic fact that technical
parameters are open to interpretation is the biggest limitation of it. A person
can make even a wrong plan and still find logic in it. With so many people looking
at same technical indicators at the same time and making similar decisions, the
technical indicators can prove self-fulfilling prophecy. For instance if some
technical indicators predict upward movement of a currency and a large number
of people buy it, then its value will automatically rise, but this will not be
in concurrence with the actual parameters and thus it will not remain high for
much time and fall back to its actual value.
Technical analysis is a very
useful tool in Forex and it should be use with sufficient caution. The trader
should think logically and not get emotionally attached to a trend.
Understanding the technical analysis will surely help the traders.
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