When it comes to trading fx or any instrument we look at technical analysis and chart to interpret the future price movements, but there is a common misconception among the traders.
Technical analysis is not a magic system that can predict each movement in the market and most traders do believe that if only they can get a chart right, if only they understand the moving average right, if only they understand the MACD right they can become rich, I’m so sorry because I have to disappoint you, Understanding technical analysis can only help you improve your success ratio.
For trading, there are two main approaches to the analysis Market.
- Fundamental Analysis
- Technical Analysis
Both can be used effectively if understood and put to use properly
Many traders use Fundamental Analysis as it would be easier to grasp the outcome of News releases, Headlines, Political-Economic Event, Conflict news between two nation, terror attacks, quarterly earnings report, but the fact is Fundamental analysis cannot predict whether the instruments is going up or down, and it doesn’t tell you how far it goes up or how far it goes to fall down.
Technical analysis is a method of analyzing the historical price movements and volume to determine the probabilities of future price movements of securities like stock, currency, index, etc,,, this technician looks to take emotion out by applying rules. A fundamental analyst looks at economic trends of a company or a country if an asset is the price is lower than the expected he would buy, if the price is higher than expected he would sell,
The very often technical analyst is not concerned with the fundamental strength or weakness of a company, the prevailing economic situation, corporate performance or government policies and believes that the chart has every bit of information and he looks whether the market is overbought or oversold and understands the mass psychology bias of buyers and seller in the market technicians believe that history tends to repeat,
“I believe the future is only the past again, entered through
– Sir Arthur Wing Pinero, 1893
The real-time demand and supply for a particular instrument determine the price of that particular instrument at that particular time, Markets are a manifestation of human psychology and they are driven by the emotional forces of greed and fear. These emotional forces influence and determines the demand and supply for stocks since the trader’s emotion and estimations change continuously for many reasons, the price of the instrument will also fluctuate accordingly as per the demand and supply forces. This fluctuation serves as the basis for technical analysis to predict future price movements.
Demand increases if the trader hopes the profit increases, supply increases the trader’s fear of loss increases, the imbalance in demand and supply forces results in the rise and fall of prices.
With technical analysis, a trader can easily understand the entry and exit points, price trends, and other factors and predict where the price is heading.
Principle of Technical Analysis,
Each price represents a momentary consensus of value if all market participants, large commercial interest and small speculator, fundamental researcher, technicians and gambler at the moment of transaction
A technical analyst believes that the current price chart reflects all the possible information. The market price reflects the sum knowledge of all participants, like traders, investors, portfolio managers, buyers, sellers, market strategist, Technical analyst looks at the price and what it has done in the past and assume it will perform similarly in future under similar circumstances.
A technical analyst knows the price of everything but the value of nothing and they focus only on two factors, the current price and historic price.
The principles of support, trend, resistance, and trading in the range can be used on any chart, Technical analysis can be used on any time frame and on any tradable instruments like stocks, commodity, forex. Etc.