Knowing the fundamentals or the news does not guarantee currency trading success – You need to be able to measure investor psychology and how they perceive the fundamentals, to get the big picture and that’s exactly what forex technical analysis does.
Many traders don’t fully understand the advantages of technical analysis – and refuse to believe that it works but it does – so let’s look at how and why it works.
Forex Technical Analysis Defined?
Is defined as the study of price action through the use of forex charts – for the purpose of identifying price trends – Forex technical analysis uses the following equation:
Market Perception (trader psychology) + Fundamentals = Price Movement
Forex technical analysis assumes that all known fundamentals are instantly reflected in price action and with the news available to all in a split second this is true. Forex technical analysis therefore concentrates on the price action.
So technical analysis does study the fundamentals and more importantly how they are perceived by the participants.
Many forex traders claim that technical analysis can’t work – because you need to know and study the fundamentals in depth – this is simply not true and won’t help you.
Why?
Because we all have the same facts to look at and we all draw different conclusions from what we see – its is humans that determine the price of anything and this is the key to why technical analysis is so powerful it gives you the whole picture.
The fundamentals and how humans perceive them.
Some of the largest price moves in history have occurred with little or no change in the fundamentals and any market is most bullish at a market top and most bearish at a market bottom – this is investor psychology at work.
If you use technical analysis you are trading the reality and you don’t have to guess or predict it’s clear for you to see from your forex charts.
You don’t need to let your emotions get involved or listen to the opinions of experts you simply trade on what you see.
Of course because human nature is constant you can trade repetitive chart patterns that reflect human psychology and if you look at the price history of any currency you will see them.
Technical analysis is easy to learn and takes very little time to apply but if you use forex charts correctly you can make huge long term gains.
It’s an art not a science and you need to use the right tools and that will be the subject of the second article in this series.
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