Technical analysis involves analyzing facts and figures to understand price and/ or flow of a currency pair during past in order to foresee future. This analysis is based on three rules:
1. It mainly believe that there are some other factors which effect the behavior of forex market besides the movement of a currency pair’s price, like inflation, political factors, supply and demand and interest rates also.
2. It depends upon the fact that forex market behaves in a well defined pattern. Technical analysis keeps on these well defined patterns.
3. The persistence of these patterns that reiterate themselves over a period of time is the core of technical analysis.
Demerits of Technical Analysis
1. Some critics believe that the whole approach of technical analysis, that future prices depend on the current day’s prices, is relatively incorrect.
2. Some argue that technical analysis provides overdue signals about the behavior of forex market. Therefore traders miss the opportunity of earning from about one-third of the fluctuations.
3. Short-term technical analysis is inappropriate for predicting the flow of forex market.
Benefits of Technical Analysis
1. Technical analysis can be used for predicting price and / or flow of any capital market tradable asset whose value is determined by demand and supply factors.
2. It emphasis on analysis tools and ways for forecasting about the forex market and reduces the dependences on emotional muddle on the trading desk.
It guides about the closing behavior of the forex market, by which a trader can earn profit or reduces its losses.
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The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis.
Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value.
Technical analysis takes a completely different approach; it doesn’t care one bit about the “value” of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market.
Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.
By–
Telika Ramu
India