Using Technical Analysis To Trade On The Forex Market
In trading on the Forex market, as with every type of market trading, there are different strategies traders use in order to try and beat the market, or at least predict it’s direction. Some of these strategies have been around for as long as investors have been trying to make profits, while some are new, a direct result of the Internet and the ability to easily look at and manipulate mountains of data online.
Investing strategies can be grouped into two types, or categories: fundamentals, and technical analysis. The basis for fundamentals is almost self-explanatory. Investors look at the real-world data on a company or marketplace, such as economic conditions, demand, profit & loss, supply, etc. The idea behind these strategies is that with enough accurate information, one can get a good sense of where a company or market is going. For example, we know that in economic boom times, people have more discretionary spending money. Therefore, spending on luxury items will increase. As a result, companies that provide these items will see an increase in demand; similarly, areas of interest to tourists will likely experience a boon in revenues.
Technical analysis is almost completely opposite in it’s approach. In fact, investors using this type of strategy often quip “less information is better”. The basic idea behind technical analysis is that markets operate in predictable cycles and patterns over time. That basic premise is then refined such that an investor will identify the beginnings of a pattern, and bet or invest in it’s continuing.
Because we can now easily ‘crunch’ historical market and economic data, it’s relatively easy to look for and spot these trends and patterns. Technical analysts live and breathe charts. These charts provide the visible basis for discerning patterns.
And because of the availability of historical data, this approach can be “back-tested”. The idea behind back-testing is come up with some investing formula, and “back test” it by overlaying it on past market performance. Since the outcome of past indicators is already known, one can quickly see if a particular formula “comes out right”.
With Forex trading, the number of variables is gigantic. This makes “fundamental” analysis much harder than it is with a single company or commodity. As such, trading in the Forex market lends itself much more to technical analysis. In fact, the intricacies of the foreign exchange marketplace are such that this has become the mainstay of Forex investors.
All of the automated Forex robots and autopilot systems rely on technical analysis to do their thing. They are essentially programs that look for patterns that have been pre-programmed into them. When these patterns are spotted, the program or robot can make decisions based on the assumption that the pattern will continue on in the same fashion that earlier, previous patterns have.
If you have intentions of becoming a successful Forex trading investor, you’ll want to at least learn about and become familiar with the more common technical analysis patterns. While assuming that past performance is a certain indicator of future performance will often land you in the poorhouse, if done properly, technical analysis can be the surest way to profit in this global trillion-dollar marketplace!