The Top Five Benefits of Technical Analysis
Technical analysis involves the use of charts and technical indicators to predict the price movement of a currency. Many people (called technicians) swear by this approach to price forecasting while others (called fundamentalists) wont touch it. Most traders know that technical analysis has its advantages and strong points, but that it also has limitations. Many Forex traders use charting methods alone while others use a combination of approaches. Lets examine the benefits of technical analysis.
- Technical analysis focuses on price movement.
The primary focus of technical analysis is on the movement of prices. Charts show how prices are moving (or not moving), when prices are trending, and the strength of those trends. Volume, oscillators and momentum give a clearer picture of market action. And this information can be obtained at a glance.
Unlike fundamentalists, technicians do not use economic reports that analyze the demand for a currency.
- Trends are easily found.
Taking a look at a moving average line quickly displays a price that is trending or stuck in a range. Whether it is up, down, or sideways, a chart can quickly display a currency that is exhibiting a trend. Trends are critical to technicians because a currency is likely to continue moving in the direction of the trend. Charts show them clearly and quickly.
- Patterns are easily identified.
One of the basic tenets of market action is that it repeats itself in clear, unmistakable patterns. Using charts helps the trader to find patterns and predict price movements based on these patterns. Like star constellations, patterns can be complex and complicated.
Head-and-shoulders patterns, rounding tops and bottoms, ascending and descending triangles, and double and triple tops are proven patterns that many currency prices will follow. Hence, they have strong predictive powers. They can be impossible to detect without using a chart.
- Charting is quick and inexpensive.
Computers have relieved us from the burden of performing complex mathematical operations. The Internet has a wealth of different technical indicators available that can help the trader to make more profitable and more reliable trades. Many brokers offer these types of technical indicators to their clients as part of their package.
Technical analysis is less time consuming and less costly than fundamental analysis. It can be performed in less than five minutes and the services are very often offered for free or at a nominal cost.
- Charts provide a wealth of information.
Charts and indicators can provide a huge amount of information in only a few moments. Trends are easily found. Support and resistance levels are quickly identified. Momentum, volatility, and trading patterns appear quickly and easily. There are more than fifty kinds of indicators and they each provide information on different aspect of how a currency is moving. This information is critical to technicians to make sound and profitable trades.
Charts tell a story about the personality and price movement of a currency. The story can be complex with many different plots and twists or quite simple with only a few characters and single narrative. Charts are the same way. They can provide only the most basic information on a trend or support and resistance. However, they go much deeper to provide information on the strength of a trend, how momentum is building, and whether formations are developing that the can be traded.