Risk Management with Technical Analysis
The second method used to forecast Forex price movements is called technical analysis. This framework is built around the ability of a trader to study price movement, allowing them to look at historical changes and therefore determine potential future price movements. We have all heard the phrase ‘history tends to repeat itself’, well this is the basic principle behind technical analysis. Traders who apply technical analysis will look for similar patterns that occurred in the past, they will then initiate trades based on these ideas, believing that the price will follow the same pattern as it did before. Some of the more commonly known technical analysis methods include the Fibonacci numbers, relative strength index, moving averages, pivot point and the Elliot wave. All of these forms of technical analysis are studied by traders using what are called charts. Charts are used because it makes it much easier to visualize historical data. By looking at the past, you can identify patterns and trends in certain trades, thus allowing you to find some great trading opportunities.
Technical Analysis Limitations
If it were true that everything that happened in the past will happen again on the Forex market, well everyone would be rich! Unfortunately this is not always the case, no matter how much you study or plough through chart after chart, sometime it just doesn’t happen again. The future does not always equal the past. There are a number of unexpected variables that are not considered what so ever in Technical analysis. For example: change of country leaders, government changes, natural disasters, war, bank policy alterations and even terrorist attacks. All these could have a devastating affect on a currencies supply and demand, therefore throwing all your hard work (and money) out the window. This is not to say that utilising technical analysis cannot be extremely lucrative. The best option is to use a combined approach of both technical and fundamental analysis, allowing you to optimise plots on your investments and minimise your risk.
Within the Forex market, traders usually take advantage one of three popular charts, depending on their skill level and the information they are seeking. These charts are: the line chart, the bar chart and the candlestick chart.