Technical analysis has been a part of financial practice for many decades. It is a method of prediction price movements and future market trends by using chart. It is necessary for you to know the pros and cons of technical analysis so that you can trade with complete ease.
There is no doubt that technical analysis is the easiest and most precise method of currency trading. So, let’s find out the top 3 pros and cons so that you can trade with complete ease.
1. Provide All Current Information
The current price reflects all current known information about an asset. While rumors may constantly suggest that the price may plummet or surge, absolutely the current price is the balancing point for all information. As investors and traders sway from one side to the other – buyers or sellers – the asset moves reflecting the current perception of value.
2. Prices Move in Trends
If prices just gyrate wildly and randomly it would be very hard to make money. While wild gyrations do occur, overall prices typically move in trends. There is a directional bias to the price which provides traders with an advantage. Much of technical analysis is about determining when a trend is in place, when it is not (called a sideways market, range or correction), and when a trend is reversing.
Most profitable trading methods used by traders are trend following strategies. This means you isolate the trend, and then find opportunities to enter in the same direction as the trend, thus capitalizing on the direction biased price movement.
Trends occur on various “degrees”. For example, you may have a long term uptrend on the daily or weekly chart, but on shorter time frames – or at the far left of a chart – you may have a downtrend.
A major advantage of technical analysis is that it provides you with ways to ‘time’ your trades. With a fundamental approach, your research may dig up some interesting news on a company’s stock that you think may cause it to rise in the future; But when?
With Forex technical analysis you can wait and use you money for other opportunities until the price tells you the stock is ready to move higher.
As there are both merits and demerits of technical analysis, it is also important for you to know the downside. So let’s look out the cons now.
1. It can be dangerous to depend entirely on the assumption that today’s prices predict future prices. They often do, but not necessarily.
2. Replying on charts completely will not help you to pick up the signals about the changing of a trend until the change has actually taken place. This means you could miss up to one-third of the fluctuations in currency trading.
3. It is also possible in currency trading to act on a pattern prematurely or in a bit of a panic. If a large number of currency traders do this, it can create a self-fulfilling prophecy.
Go through the points above on the advantages and disadvantages of technical analysis to get more familiar with Forex technical analysis while trading.