The Role of Technical Analysis in Forex Trading
Before I dive into the importance of technical analysis, it’s important to understand the two roles involved in trading any asset which is fundamental analysis and of course technical analysis. The difference between the two may not sound like much to the naïve retail trader however to professional traders there is a huge difference in their purposes. In this blog we are not going to uncover the layers behind fundamental analysis, but we will study the role of technical analysis in Forex trading.
The first thing I would like to state is that technical analysis should not be used to generate ideas and should be used for timing and execution purposes only. For example, when looking at the chart of GBPUSD we should not use technical analysis or our imagination to generate any form of bias on that pair whether it is short term or long term. Often the duration of Forex trading and technical analysis can be argued however, the moves are so small that I refuse to simply entertain the belief that ideas should be generated from this. There may be strategies that work on smaller timeframes, there’s no denying it, but the role of technical analysis should not be used to generate any bias.
When a fundamental analysis has been completed on a currency pair there will always be the question “where should I enter this trade” and this is where technical analysis comes into play. We can use various methods such as trend lines, support & resistance, Fibonacci’s etc in order to execute a trade. By using these tools, a trader may have a back tested strategy in place that can confirm a likely chance that price will act accordingly around an indicator or certain price thus increasing their chance of being on the right side.
While entering a trade is one role of technical analysis, it can also be an excellent tool to look at for exiting positions for a trade. Looking at resistance levels (for long positions) can often indicate a good sign to sell the long or support levels can indicate opportunities to buy back a short position with the intention of profiting. There are more advanced methods that can be used to calculate stop losses and Rory would be a good person to ask about this if you are interested.
Finally, for beginners. Technical analysis is a great way to learn how to read charts, understand trends within the chars and allow a new trade to identify whether the market is trending upwards, downwards, or sideways. This information can allow a new trader to make better judgements until they are a lot more comfortable with generating ideas at the fundamental level.
If you would like to learn more about technical analysis, a great way to start is by asking the community in the Two Blokes Trading app as lots of people including Mike, Rory and Jonathan are willing to give their opinion on it.
Thanks for reading,
Two Blokes Trading
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