Technical analysis has been a part of financial practice for many decades. This is a method of forecasting price movements and future market trends using a chart. You need to know the pros and cons of technical analysis to be able to trade at full ease.
There is no doubt that technical analysis is the easiest and most accurate method of currency trading. So let's understand the first 3 pros and cons so you can trade at full ease.
1. Provides all relevant information
The current price reflects all currently known information about an asset. While rumors may constantly suggest that the price may drop or jump, the current price is ultimately the balancing point for all the information. As investors and traders swing from side to side – buyers or sellers – the asset moves, reflecting the current perception of value.
2. Prices are trending
If prices just go wild and random, it will be very difficult to make money. While wild quotations are observed, overall prices tend to be trending. There is a price bias that gives traders an advantage. Much of the technical analysis has to do with determining when a trend is present, when it is not (called a side market, scope, or correction) and when the trend reverses.
The most profitable trading methods used by traders are trend-following strategies. This means isolating the trend and then finding opportunities to go in the same direction as the trend, thereby benefiting from price movements addicted to the trend.
Trends appear at different "degrees". For example, you may have a long-term upward trend on a daily or weekly schedule, but with shorter time frames – or on the left-most part of the chart – you may have a downward trend.
A major benefit of technical analysis is that it provides you with ways to "time" your trades. In a fundamental approach, your research can dig up some interesting news about company stocks that you think may lead to an increase in the future; but when?
With Forex's technical analysis, you can wait and use your money for other options until the price tells you that stocks are ready to move higher.
As there are both advantages and disadvantages to technical analysis, it is also important to know the disadvantage. So let's check out the downsides 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. Responding entirely to the diagrams will not help you to pick up the signals for a change of trend until the change has actually taken place. This means that you can miss up to one-third of the fluctuations in currency trading.
3. It is also possible for currency trading to act prematurely or in little panic. If a large number of forex traders do this, it can create a self-fulfilling prophecy.
Review the points above about the pros and cons of technical analysis to get a better understanding of Forex technical analysis while trading.