One of the critical tips given to investors in the currency markets is to use technical analysis. However, technical analysis is controversial, with some championing it and some saying it does not work. Some people respect and use technical analysis, such as many mainstream analysts, while some investors think technical analysis is dispensable. So, is technical analysis useful in forex trading?
To understand whether the technical analysis is practical, we must first understand what technical analysis is. Technical analysis uses mathematical and logical methods to explore the past behavior of the financial markets to judge the most likely future scenarios based on the analysis of price trends. When used in foreign exchange transactions, it means judging future exchange rates based on past exchange rates. The core idea is that the relationship between supply and demand determines the exchange rate. Supply and demand result from fundamental factors, investors' expectations, and various rational or irrational factors. Therefore, the relationship between supply and demand in the foreign exchange market is the only situation that needs to be studied.
Some experts believe that the technical analysis of the foreign exchange markets is based on three assumptions. One is that all the information generated by the market behavior is reflected in the price. Therefore, the price represents every factor affecting a currency pair. The second is that if the exchange rate moves in a specific trend/ direction, it will keep moving in the same direction until the supply and demand factors change. The third idea is that the technical analysis of foreign exchange transactions has always been controversial. After novice investors have a solid understanding of the markets, they start learning to trade and know more about technical analysis. However, despite using technical analysis to trade, they may still lose money or incur significant losses. Hence, some people think that technical analysis is unreliable.
However, that is not the case. Many of the massive losses incurred by investors come from their misunderstanding of technical analysis. They memorize the technical analysis strategies thoroughly and use them as a reference book for trading. However, they miss crucial factors such as risk management, trading psychology and proper money management that lead to them incurring losses. Therefore, their losses reflect their skills and are not proof that technical analysis does not work.
How to choose the right investment strategy
As CFD trading becomes more and more popular amongst investors, all kinds of strategies emerge because investors need to learn technical analysis to survive in the market. Therefore, they have a variety of strategies that they can use to invest in the markets. With the emergence of so many strategies, how should investors choose a trading strategy that suits them?
Learn simple trading techniques. Basic and straightforward trading techniques are often more effective than complicated strategies. Simple trading techniques will not use complex methods; hence, they will not confuse investors. They are based on the candlestick charts used for direct analysis, which usually reflect the current trend in the financial markets. Investors can analyze those unfathomable trading techniques all day long instead of trading. Therefore, it is better to learn the basic skills first, the simplest trading techniques, and then learn other knowledge later as you keep trading the foreign exchange markets.
The more common or popular the trading strategy, the better. The most common techniques are the ones investors need to master since they usually work. The simple reason they work is that the techniques have been proven over time by countless market reactions.
Don’t waste time on esoteric trading strategies. Many CFD trading technologies are not as complex as imagined. Many techniques only required minimal research to understand the logic behind them. When encountering challenging to understand technical analysis advice when trading, you can simply ignore that. There is no positive relationship between positive trading results and the difficulty of trading techniques.
Try to avoid very complicated techniques. The essence of trading is not that the more complicated the technology, the easier it is to make money. Using complex technical indicators will confuse ordinary investors, which is no help to most investors. Instead, it disrupts investors' thinking, so you should avoid overly complicated trading techniques when choosing a trading strategy to avoid having a chaotic trading routine.
Whether or not you can profit in the investment process primarily depends on the investor's trading ability. Everyone has their investment method and trading strategy. Others think that using technology may not be suitable for them. Therefore, investors should be careful when trading. Summarise your own experience slowly, learn slowly, and make choices according to your situation.
High-risk investment warning: Trading Foreign Exchange (Forex) and Contracts for Differences (CFDs) is highly speculative, carries a high level of risk and may not be suitable for all investors. You may sustain a loss of some or all of your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin. Any opinions, news, research, analysis, prices or other information contained in this presentation is provided as general market commentary and does not constitute investment advice.