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Understanding The Role & Relevance Of Technical Analysis In Forex Trading


Those who are new to the world of forex trading may be intimidated and confused by the amount of information that they need to process and filter before making a trading decision. The learning process can be time-consuming for a beginner but you should not get into trading until you learn about all the market fundamentals and technicalities of trading. Because the currency market is very volatile in nature, making accurate predictions won’t be possible without mastering the art of technical analysis. But what is the role of technical analysis in forex trading? Why is technical analysis so relevant in the trading process?

This blog will explain what technical analysis is and why you need to learn about it to attain success as a forex trader.

Basics of technical analysis

Understanding technical analysis would be easier when we start with the basics. Forex trading is all about currency pair prices and as traders, you will be attempting to make profits from the potential price fluctuations. But how can a trader be sure about the direction in which the prices will move? The answer lies in technical analysis which uses visual tools like charts to thoroughly present the market data. The prices will be plotted on a chart and you can draw lines to connect the price points for a specified period of time, which reveals the pattern in which the prices are moving.

You should also be using tools like trading calculators for estimating the best price points for entering and exiting a trade based on the number of pips you want to catch to reach your profit target in a trade. You need to use such tools to learn more about technical analysis as pips are the basis for all trading decisions that you make while navigating the forex market. Trading calculators are not directly used for technical analysis but they help in planning the trades once you are done with the analysis part.

Coming back to how technical analysis works, the price patterns can be used to interpret the market situation as these patterns tend to be repetitive and when you compare it with historical price movements, the potential price movements can be predicted on the basis of what you see in the charts. This is the essence of technical analysis and forex traders rely on Japanese candlestick charts as it has become the standard chart type for currency trading. It is very detailed with each candle providing price information for a definite period of time which can range from minutes to months.

The key support and resistance levels that show the price levels at which you can expect a significant shift in the direction (an uptrend can change to a downtrend and vice versa) are some of the most basic things to look for while depending on technical analysis. Price action strategies in forex are always executed by only focusing on technical analysis and you can also use various technical indicators like Moving Averages, RSI and more based on the information you need for implementing your trading plan with precision.

Relevance of Technical Analysis in Forex Trading

As I stated earlier, technical analysis is an essential part of the trading process as you cannot figure out the best price levels for opening and closing a trade position, without monitoring the real-time price charts. If you are a beginner, I will suggest using MT4 as this platform is easy to use and has less but all the necessary timeframes, indicators and other tools which makes the learning process easier. It will surely take some time to develop your analytical skills but the simple layout of MT4 is very suitable for novice traders.

Technical analysis is not just about trying to predict the market situation but it is more about watching how the market is responding or moving before planning your trade. The predictions or anticipations tend to be more accurate with technical analysis as you are not making mere assumptions but relying on reasoning and logical calculations based on what the numbers and patterns are signalling. Thus, the relevance of technical analysis can never be overstated.

It would not be wrong to say that the success rate of a forex trader will have a lot to do with their knowledge about the technical side and analytical skills. Technical analysis is also important for assessing the risk and making decisions with a sound strategy to make profits while managing the risk in an effective manner. Even the perfect strategy will fail to bring the desired results if you are not good at analysing the market situation while executing trades.

Applying technical analysis

Technical analysis has been utilised for centuries by traders, analysts, and investors, and it is now widely accepted by the academic community as well. Even though this method is understood as a set of precise guidelines, how the results are viewed typically relies on the experience level and viewpoint of the individual. The information you get from the price chart and patterns can be interpreted differently. There are some general guidelines about which patterns are bullish, which patterns are bearish, which patterns show the continuation of a trend and which patterns signal potential reversals. But again, different analysts may perceive the data in different ways based on what they are looking for.

Put another way, there are specific rules that apply to computations including indicators. However, based on the approach and viewpoint of each analyst, the interpretation of these computations typically depends on a blend of analytical techniques. From this angle, technical analysis and fundamental analysis are comparable because both involve the application of specific guidelines and calculations. The ultimate interpretation, however, is based on the personal viewpoint and experience of an analyst or a trader.

Another thing to mention about the application of technical analysis is that for those who want to trade multiple asset classes besides forex or if you want to use advanced chart types with different frames, the MT5 platform will be an apt choice as it gives you more options when it comes to charting tools, timeframes, indicators and analytical objects. Even the platform and tools that you use will impact the accuracy of your analysis. So, make sure that you choose the best one based on your requirements.

Use Cases of Charts in Forex Trading

Long-term forex investment decisions can be made using signals taken from weekly, monthly, or annual charts. These charts are analysed by numerous traders and institutions in order to find lucrative chances. Some well-known experts in the field of technical analysis of the currency market compare charts to the peel of an onion in that deeper information is progressively revealed on each layer.

As a result, you must examine more sub-layers the shorter the chart’s time span. To improve your performance in purchases or sales, you can adjust the charts’ time frames to fit your time horizon. A long-term investor, for instance, would look at trends and changes on monthly charts before consulting weekly or daily charts to decide which trades to make tactically.

Benefits of Technical Analysis in Forex

  • Easier to comprehend – It surely takes some time to learn the technical terms and develop chart reading skills like pattern recognition and interpretation. However, it is way easier than fundamental analysis as you don’t really need in-depth market knowledge or understanding of economics for technical analysis. It is considered to be more suitable for beginners as it is simple and has a set of principles that are more specific than the ones applied in fundamental analysis.
  • Higher precision – Another benefit of technical analysis is the higher level of accuracy. What you rely on for technical analysis is nothing but real-time price data and a bunch of indicators that are based on mathematical equations. Hence, you won’t have to worry about whether the data obtained is correct or not. Besides this, you can even find some advanced calculators like pivot point calculators and Fibonacci calculators which can make your analysis more precise by helping with the calculations.
  • Timely decision-making – Technical analysis is less time-consuming in comparison to fundamental analysis and it is even more suitable for those who trade shorter timeframes as you will be getting real-time market data to work with which is essential for making timely decisions. You may miss out on good trading opportunities if there is any delay in analysis or decision-making, especially when it comes to the favourable entry and exit prices for a trade.

In The End

Technical analysis may not be 100% perfect or accurate all the time and that’s why traders are advised to also keep an eye on the news while planning their trades. If you are trading longer timeframes, then you should always pay attention to the fundamentals that drive the market and even if you execute trades within a short span of time, you should not miss out on any news or economic event that can impact the prices of the pair that you are trading with. Having said that, you need to take your time to master technical analysis as practice is essential to get it right.

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