It is not always easy to recognize good opportunities in Forex. However, although financial analysis is not an exact science, it is a good way to anticipate market trends and opportunities.
Origin of technical analysis
The importance of technical analysis has been recognized since the 17th century in Japan. This tool has been used to forecast the price of rice and to anticipate its sale even before it is put on the market.
Then, during the 19th century, Charles Dow, known as the founding father of technical analysis, whose theory was deepened by other great theoreticians such as William Delbert Gann or Ralph Nelson Elliott, introduced this concept to the stock market to allow more traders to maximize their profits.
Since then, more and more investors have been using this analysis before embarking on a Forex transaction. In fact, this type of analysis goes a long way in understanding sell and buy signals.
Renowned for being very effective in swing trading and day trading, technical analysis also has the advantage of allowing the trader to anticipate the rise in exchange rates and better direct his transactions.
Technical analysis: an effective method for predicting market trends
In practice, technical analysis in Forex is based on the phenomenon of imitation and the observation of cyclical trends.
Thus, thanks to the analysis of charts and financial indicators of the moment, traders will be able to identify a similar situation. And they will be able to establish the strategy to adopt.
There are two different methods for doing technical analysis in Forex. These are chartist analysis and modern analysis.
Anyway, these two analyzes are not contradictory and can even be combined for a better result.
The Chartist Analysis
Chartist analysis is based on the identification and interpretation of the patterns presented on the charts. The analysis of these configurations then makes it possible to situate oneself in a case that has already occurred in the past.
The most well-known configurations are double tops, shoulder-head-shoulder (ETE), double bottoms, triangles, etc. On a Japanese candlestick, for example, the main configurations are the evening star, the shooting star, the harami, etc.
The modern analysis consists of the interpretation of charts using specific technical indicators.
It allows the trader to detect certain financial situations such as a bottom trend, overbought, market volatility, etc. It should be noted that these are not always easy to detect for a new trader.
Other Benefits of Forex Technical Analysis
Technical analysis is a safe way to gather as much information as possible, both from charts and from the various indicators studied. It’s the best way to shield you from a bull trap and other adversities on the market.
Then, it also allows the trader to detect exchange opportunities following trends. Indeed, whether the trend is bullish, bearish or flat, there are always opportunities for traders who know how to develop the right strategies.
It is also important to know that technical analysis plays a major role in the psychology of Forex buyers and sellers. It encourages them to adopt an adequate trading system.