When To Use Technical Analysis In Forex

When To Use Technical Analysis In Forex

Over the last decade, we have seen some major technological differences that have filtered into the financial markets.  Increased use of computers has not just made it easier to connect with your friends on FaceBook or Twitter, it has also made it easier to analyze what is actually happening in the financial markets.  For those trading in the forex, this is critical information because it can be very difficult (or even impossible) to successfully navigate and understand all of the fundamental factors that might go into accurately valuing a currency.  When we can’t accurately value a currency, we cannot successfully trade in the forex markets.  So it will always be important for traders to have an understanding of when exactly technical analysis should be used when placing trades.

Placing Trades:  Exit and Entry Levels

Perhaps the best use of technical analysis comes with its ability to help forex traders identify good levels for exit levels and entry levels.  It is critical that you enter into the market at a value that is going to be able to sustain your position.  If you are going long in a trade and you buy too high, it is going to be very difficult to make a decent profit if prices can’t move much higher.  Conversely, if you are going short in a trade and you sell too low, it is going to be very difficult to make a decent profit if prices can’t move much lower.  So exits and entries will always be one of the most critical factors in determining profitability and risk levels for any forex trade.

Recent reports from Swiss forex broker CornerTrader have shown that a growing number of forex traders are using technical analysis strategies when developing a consistent market view.  This is important because it shows that the market is not as interested in corporate earnings and interest rates as it used to be.  Instead, forex traders are monitoring price activity itself and looking for instances where it makes the most sense to base market positions on technical analysis techniques.  This is not to say that there is nothing wrong with fundamental analysis.  But when we are dealing with the specific nature of the forex market itself, there are many good arguments that can be made in support of chart trading decisions.

From the fundamental side, forex elements are literally global in nature, so if this is the only information you have available it is a good time to start looking back to your forex education materials and to reconsider the use of technical analysis strategies.

 

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About the Author
Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics and price behavior in equity markets. Trade ideas are generally suggestive of time horizons of one to six months.

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