Technical analysis is a method of predicting price movements
and future
market trends by studying what has occurred in the past
using charts.
Technical analysis is concerned with what has actually
happened in the
market, rather than what should happen, and takes into
account the price of
instruments and the volume of trading, and creates charts
from that data as a
primary tool. One major advantage of technical analysis is
that experienced
analysts can follow many markets and market instruments
simultaneously.
Technical analysis is built on three essential principles:
1.
Market action discounts everything!
This means that the actual price is a
reflection of everything that is known to the market that
could affect it.
Some of these factors are: fundamentals (inflation, interest
rates, etc.),
supply and demand, political factors and market sentiment.
However, the
pure technical analyst is only concerned with price
movements, not with the
reasons for any changes.
2.
Prices move in trends.
Technical analysis is used to identify patterns of
market behavior that have long been recognized as
significant. For many
given patterns there is a high probability that they will
produce the expected
results. There are also recognized patterns that repeat
themselves on a
consistent basis.
3.
History repeats itself.
Forex chart patterns have been recognized and
categorized for over 100 years, and the manner in which many
patterns are
repeated leads to the conclusion that human psychology
changes little over
time. Since patterns have worked well in the past, it is
assumed that they will
continue to work well into the future.
Disadvantages of Technical Analysis
•
Some critics claim that the Dow approach (“prices are not
random”) is
quite weak, since today’s prices do not necessarily project
future
prices;
•
The critics claim that signals about the changing of a trend
appear too
late, often after the change had already taken place.
Therefore,
traders who rely on technical analysis react too late, hence
losing
about 1/3 of the fluctuations;
•
Analysis made in short time intervals may be exposed to
“noise”, and
may result in a misreading of market directions;
•
The use of most patterns has been widely publicized in the
last several
years. Many traders are quite familiar with these patterns
and often act
on them in concern.
This creates a self-fulfilling prophecy, as waves of
buying or selling are created in response to “bullish” or
“bearish”
patterns.
Advantages of Technical Analysis
•
Technical analysis can be used to project movements of any
asset
(which is priced under demand/supply forces) available for
trade in the
capital market;
•
Technical analysis focuses on what is happening, as opposed
to what
has previously happened, and is therefore valid at any price
level;
•
The technical approach concentrates on prices, which
neutralizes
external factors. Pure technical analysis is based on
objective tools
(charts, tables) while disregarding emotions and other
factors;
•
Signaling indicators sometimes point to the imminent end of
a trend,
before it shows in the actual market. Accordingly, the
trader can
maintain profit or minimize losses.
Be disciplined, don’t be greedy.
Close your Forex the position as you originally planned.
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