Why is Technical Analysis Important in Forex Trading?
Are you interested to earn money by trading in the forex market?
Foreign exchange is a process of exchanging a currency into another currency for several reasons, might be for business, hedge, overseas payment, or travel.
In the next section, we will guide you to the basics of the Forex market including the elements of it. Therefore, you would know the overall activity before jumping into forex trading where a wider money-making opportunity is waiting for you.
The importance of technical analysis is huge in Forex trading. A trader who doesn’t know about macro or microeconomics can make money just by following technical analysis rules. Moreover, this method is used by most professional and institutional traders, which makes it more perfect for the market.
As a trader, it is very important to understand the importance of technical analysis in Forex trading that we will see in the following section.
What is Technical Analysis?
Technical analysis is a process to anticipate a financial instrument’s price movement based on its past performance. The past performance includes how the price reacted to specific price action or a specific condition, and we will expect that the price will do the same in the future.
In the financial market, the price of a currency pair moves down or up based on the emotion of traders all around the world. Therefore reactions of traders on a particular price pattern repeat in the financial market.
The main aim of technical analysis is to follow the emotional repeat and make money on the basis of previous price behavior. However, things are not easy like this as it requires a lot of patience, calculations, and risk management techniques to get the ultimate result.
As you know, the financial market is full of uncertainty that often makes it impossible to make money by using any simple technical analysis indicator. Therefore, as a trader, you should match the requirement and market behavior with previous calculations to achieve your trading goal.
What is a Technical Indicator?
Technical indicators are trading tools that calculate the current price condition based on the previous calculation. Remember that the technical indicator does not provide any future price direction. It is a trader’s duty to analyze what the price action happened in the chart and how it will affect the future price direction.
For example, the world’s most used technical indicator is the moving average that shows the average price movement of a currency pair. If we select 100 Simple Moving Averages, we will see the emotion of traders based on the last 100 candles.
Therefore, if the price moves above the 100 Moving Average, we may expect that bulls are stronger than bears. So we may expect that the price will move upside in the coming session. To increase the accuracy of this indication we will use more technical analysis or market sentiment analysis to achieve the high probable price direction.
However, even if you use a high probable price direction, you may lose money from the forex market. Therefore, besides using the technical indicators, you should do a lot of practice regarding how to implement them in the right place and right time.
What is Technical Analysis?
Technical analysis is very important in Forex trading that makes it used by most professional and institutional traders. The core structure of the technical analysis is perfect for all financial markets and trading instruments in forex trading.
In this section, we will see some important aspects of Technical Analysis in the forex market:
#1 Market Emotion Identification
It is the most important part of the technical analysis. In forex trading, we anticipate the price movement of a currency pair as we don’t know what will happen in the future. Therefore, even if you use a lot of calculations about the price, you may make a loss.
On the other hand, if you do technical analysis along with your other methodology, you may expect that the price will follow your direction with higher accuracy. Moreover, the forex market is driven by financial giants that create swings in the price, and these swings are seen in the trading chart and identified by technical analysis.
#2 Market Context
Market context is the nature of the price trend. When the price moves aggressively by breaking new higher or lower low, may expect that the trend is strong. On the other hand, if the price does not make any new low or high and consolidates it in a specific area, we may expect that the price is within a correction.
If you want to make a perfect trading decision, you should include the nature of the trend, and the technical analysis identifies it.
#3 Support and Resistance
Support and resistance are small price zones or levels from where we may expect a good price movement. Moreover, when the price breaks this level it creates a strong movement towards the upside or downside.
In the above image, we can see the price of a currency pair that moves sharply from a resistance level. If you consider technical analysis, you should know the importance of These areas that may increase your trading probability.
Moreover, there are important levels known as the event level; usually, the price zone used as resistance and supports both.
#4 Supply & Demand
Supply and demand are a core part of a financial market; when supply increases, a currency pair’s price will fall. On the other hand, if the demand increases, the price of currency pairs will increase.
If you understand the supply and demand of a currency pair, we can include it in your trading strategy to maximize profitability. The best way to identify the supply and demand is by doing technical analysis.
After the above discussion, we can say that the importance of technical analysis in Forex trading has no bound. There is a very long controversy about the financial market whether that technical analysis is better than fundamental analysis or not.
But there is no exact answer to it. If you can make money by following a technical analysis, it is ok. The overall aim of a trader is to make money from forex trading, and if you can do this just by following signals or taking a fund management service, it is okay.