Technical analysis is the most used kind of analysis in Forex trading. It is relatively easy to understand and comprehend for a beginner since it is comprised of charts, past data, trends and equations. Any kind of technical analysis basically uses past data and therefore is only a reflection. It does not really shape the manner in which the movements will take place in the future.
What do Technical Analysis Charts Show?
When you look at the charts generated by technical analysis, you look at what has happened in the Forex markets. These charts and trends cannot dictate the manner in which the Forex rates will move. Depending on the kind of chart that you are looking at, you will get to see the range in which a currency operates and the manner in which it reacts to specific movements in other currencies. These can be used to guess the way in which future movements can take place.
This is why you can find a technical analysis charts in almost any forex broker out there, rather if it’s the big brokers like plus 500 or the others like eToro.
Times When Technical Analysis Charts Can’t Help
Since technical analysis charts are only a reflection of the past, they are of no use when the factors that actually affect currency rates come into play. These are the times when you will see blips and major trend changes in the charts that are created. For example, if the Federal Reserve raises interest rates unexpectedly or the Chinese Government decides to stop buying US treasuries, there will be changes in the market that are beyond any kind of prediction from technical analysis. In the former case, the dollar is likely to rise higher and in the latter it will surely fall.
The Psychological Impact of Technical Analysis
The reason why the predictive aspect of technical analysis works is very simple. Almost all Forex traders and brokers look at the standard charts, the first thing in the morning. In most cases, those who know how to look at charts arrive at the same conclusions and therefore take similar courses of action. For example, if the euro has been in an up channel and is at the bottom of the channel, most traders looking for an opportunity in the euro will place buy orders. Since there are a large number of people placing orders, the demand for the currency goes up giving it a further boost and making the predictions come true.
What this tells us is that technical analysis is not something that dictates the manner in which the Forex rates move. There are other more fundamental aspects such as employment rate, gross domestic product of a country, consumer sentiment, federal rates and geo-political scenarios that govern whether the currency of a country will become strong or weak. However, it cannot be denied that technical analysis and the mass manner in which it makes people move in the same direction has the ability to make some of the trends come true. In a manner of speaking technical analysis is a self-fulfilling prophecy that becomes a reality due to the actions of a large number of Forex traders.