Most forex traders use technical tools for analysis. However, not all traders succeed in predicting price movements using this method of analysis. Although technical analysis works, success depends on various factors such as the trading currencies and technical tools and strategies used.
Traders who are not familiar with this form of analysis often have the perception that it does not work. However, traders with technical tools like Bollinger bands, MACD, RSI, Elliot waves, and Ichimoku find the technical analysis very effective in predicting market trends and price movements.
How Does Technical Analysis in Forex Work?
There are various ways in which you could use technical analysis to predict price information. You could study price chart patterns, use technical indicators such as moving averages to derive the market price mathematically or understand what the cost will do and determine the best time to buy or sell shares.
For example, when a bearish pattern forms near a resistance level on a price chart, an experienced trader identifies the position or time when the price is likely to fall than rising. Although this may seem mysterious at times, the bearish pattern reflects the bearish sentiment in the market.
For example, when you see a bearish engulfing pattern on a price chart that forms near a resistance level, you know that price is more likely to fall than rising. Technically, this can come across as something mysterious, but if you combine technical and fundamental analysis, you can understand the price behavior of the bearish patterns.
How Do We Know Technical Analysis Works in Forex?
Many scholars and traders have tried to establish technical analysis as a scientific tool of FX analysis. But, it has not been easy to develop consistent and reliable patterns of information to make the trade repeatable and dependable information.
So to find out whether Technical analysis works in forex, you can check the effectiveness of the technical analysis tool in predicting the value of currencies depending on the currency you are trading. You could also try to be familiar with the technical tools used and then influence results. Doing this will enable you to know whether technical analysis could work for you or not.
Which Technical Analysis Tools Are Used in Forex?
There are several tools that traders use for analysis under this method. However, whether they are good or bad tools is relative. It depends on the trader’s level of expertise, the type of trade, and trading strategies.
There are several tools used that actually work in technical analysis, but the experience varies from one person to the other. Let us now look at some of the most commonly used tools in technical analysis and how they work.
- Support and Resistance Levels-This tool assists traders in finding out how the price moves in the support and resistance direction.
- Chart patterns- The chart used in forex trading has two primary features, a dark cloud clover, and a piercing line. The piecing line and cloud cover patterns rise; they denote possible turning points in the market.
- Technical indicators:
- Oscillators: These are used to highlight oversold and overbought conditions whose prices might reverse
- Filter: This is a trend-following strategy that involves buying or selling when the price of a unit of trade falls or rises by a given amount.
- Moving averages: these are indicators that are used to follow trends.
- Channel breakouts: This tool finds support-resistance levels over time. The breaks often suggest a continuation in the direction of the break.
These tools are useful for predicting price movement. However you need to choose the right tool and strategies for you to make the correct predictions in a trade to make a profit. It would be best to keep in mind that people do not gain or make profits in forex all the time. Sometimes you lose due to unavoidable situations and sometime you win.
Forex trading is a volatile trade, which requires many years of experience and expertise for accurate prediction. So, although technical analysis works, there is no guarantee of success. There is always a risk of making significant losses depending on the strategy, tools or currency chosen. You have to make the right choices for you to make profits using technical analysis.