Are Technical Analysis Useful in Forex Trading?

by Richard Wong

Technical analysis is a technique that has been extensively used by investors to help them make investment decisions in the stock market. But how effective can technical analysis be used in the Forex Market? If you have been thinking about currency trading, or you if you are already in the Forex currency trading market, you may want to use technical analysis to help you make trading decisions just like investors in the stock market.

The main purpose of using technical analysis in currency trading is to analyze price trends to predict currency pair price movements that will be profitable. The same technical analysis principles apply to both the equity markets as well as to the Forex currency trading markets. The only difference is that the equity market is not open around the clock while the Forex market is.

This means that, in Forex currency trading, certain analytics that consider time periods will need some adjustments. Besides that, the common types of technical analysis methodologies used in the equity market can be used for currency trading.

There are many different methods and tools used in technical analysis, but they all rely on the same principles - that price patterns and price trends exist in the market and that they can be identified. You can then use this information to make investment decisions. The following are some common technical analysis methods in use.

Fibonacci Studies - This methodology was developed by Leonardo Fibonacci, a mathematician from the 12th century. It is based on the theory that trend changes are predictable based on lines that are based upon certain number sequences interacting with prices.

Elliott Waves - This was developed by Ralph Nelson Elliott. In this method, market performance is predicted by analyzing the wave patterns of prices that have develop over a period of time.

Pivot Points - This is a mathematical formula for determining when to get out of a trade. This method looks at the numerical average of the 3 prices - low, high, and closing prices.

Parabolic SAR - This methodology was developed by J. Wells Wilder. This methodology examines the prices in comparison to "stop and reversal" (SAR) numbers. It indicates the entry and exit points for a trade.

As has been mentioned earlier, the main difference between the technical analysis used in the currency trading market and the equity market is in the trading times. You can trade in the Forex market 24 hours each day, seven days per week, but not in the equity markets. This key difference contributes to the main reasons why technical analysis works very well in currency trading.

For technical analysis to be useful and to deliver maximum results, data is needed from extended time periods so that patterns can develop, repeated and identified. For the fact that the Forex market are always open, and currency pairs are traded non-stop, the technical analyst has a continuous supply of Forex currency trading data to work with. As such, definable patterns can develop and be identified more quickly.

Because more data can facilitate better forecastin, technical analysts get better results in quicker time. As such, technical analysis can be effectively used in Forex currency trading.