Technical analysis involves the examination of historical price movements in a bid to predict the future movements of prices. Successful forex trade relies on the examination of the underlying factors influencing the trade.
Technical analysis is vital as it allows the traders to remain alert in the event of a particular price trend. Moreover, technical analysis aids in the prediction of price changes in the future.
As a forex trader, technical analysis is vital. Technical analysis has benefits and drawbacks, which forex traders ought to be conversant with, to enable them to choose wisely on the analysis tools to help them in decision making. The following comprises the advantages and disadvantages of technical analysis.
Advantages of Technical Analysis
Price trend charts illustrate the association among numerous variables, plus the outcomes of the associations. They transform the somewhat complex interconnection into an easy-to-understand price history chart. Understanding the changes in the trend is easy since all it requires is for you to make a keen observation.
Drawing showing and reading the price charts is even easier with the use of electronic devices such as computers. Additionally, all technical analysis charts can easily be programmed to make them available in the software. Provided the requisite data is entered correctly in the software, then the charts can reflect almost immediately.
Unlike fundamental analysis, technical analysis is very objective as it cannot be influenced by human feelings or emotions. Technical analysis has no room for personal feelings.
Hence, the signals you observe be it buy or sell signals, are what they are. They cannot be manipulated to operate by the will of the traders. That makes technical analysis more trustworthy when it comes to trades’ decision-making.
Technical analysis embodies great flexibility as it can be applied to any financial market. It can be employed in the forex market, futures and forwards market, and any other trading medium. Also, technical analysis is flexible with time. That means it has no limit as to the period it can analyze. You can utilize a similar principle of technical analysis to analyze prices over hundreds of years ago, or even hours.
Technical analysis is very clear when it comes to the communication of signals. You will observe some obvious signs on the price charts, which are intended to communicate where the changes may occur on a trend. For instance, there are the double bottom patterns plus the head shoulder top patterns. These set you ready to carry out trades.
Disadvantages of Technical Analysis
1. Invaluable for prolonged trends
Technical analysis focuses mainly on short-term trades. Hence, you are able to analyze the short periods trends of variations in the forex prices. On the contrary, the longer period trends can be analyzed through the observation of major eternal factors.
For instance, political situations, policy formulations, plus capital market dynamics best suit the analysis of long-term trends.
2. Uncertainty of the purchase plus selling signals
There is great uncertainty with regards to the buying and selling prices. This could be attributed to the great distance between the purchasing and vending signals, and the coverage between the topmost and lowermost prices. The uncertainty often results in poor decision-making by the traders. Hence, most traders are often not quick to decide based on technical analysis because of its uncertainty.
3. Uncertain price plus time
Technical analysis does not provide an exact point where the price will change in the future. It can only forecast the trend, but it cannot pinpoint the exact point where the prices will rise or fall. Also, it cannot give an exact estimate of the duration of the trend.
4. Time lag
Forex trading necessitates a quick reaction. The predictions can only work for you if you are quick to implement them. However, sometimes the signals delay and the traders may be slow in making decisions. Thus, by the time action is taken, the prediction may be already historical. Hence, technical analysis if decisions are made quickly.
Technical analysis is important for very active forex traders. If you are unsure of the future price movements, technical analysis will provide you with the future trends and signal you when to buy and sell. However, it would be of great advantage to know its advantages and disadvantages to caution yourself against uncertainties.