As the fundamental analysis is dependent on world latest news and it is just that the trader has to remain updated and analyze the market, technical analysis is not the same. The traders are still perfecting technical analysis. They use their expertise to open and close the position especially in the short-term trading where the prediction is made by using the only analytical tool which is quite accurate.
Technical analysis is done on the basis of three important assumptions:
- The technical analysis claims that all the available information about a particular currency is already built in a price.
- In technical analysis, there are various technical tools that can be used to predict the future price action as it assumes that prices follow certain technical patterns and are not random.
- It claims that the currency price trend keeps on repeating which means the past price trend provides guidance for opening or closing current positions.
According to the assumptions mentioned above, the final price is determined by the conscious activity of a group of financial actors with emotions and feelings. It is same as the case with a beehive where collective effort of all the bees with sensible and logical course creates a final raw material i.e. honey. In our case, the bees are the traders and honey is the currency price.
Obviously, if the traders take a rational and meaningful decision, then the future positions of that currency is totally dependent on the past decision. And if they keep on taking these significant decisions which lead to a train of logical reasoning between the past and the present, it would be possible to analyze the pattern and follow it to make a profit.
Overall by doing technical analysis, a trader is finalizing if he can open or close a position at a particular price point or not. All this is analyzed by checking the highs and lows graph, a period of trending activity, expecting a spike and a collapse in price, etc.
What are the Advantages of Technical Analysis?
Most traders prefer honing their skills in analyzing the prices technically as it is simple and straightforward. However, in fundamental analysis, a trader has to interpret the fundamental indicators which demand a lot of strict studies as well as time.
No doubt, learning technical analysis also requires time and patience, but not as much as fundamental analysis. Technical analysis is totally based on the movement of the price, and that is why they have only one needle in their compass i.e. price which determines if they are in profit or loss and if they should keep the position open or close it.
Technical analysis of a particular currency can be done in many ways, and that is why traders are trying hard for many years to refine and perfect the skills. Thousands of successful and knowledgeable traders have contributed to the effort providing us with the best of the best tips and tricks. By mastering the skills of technical trading, we can easily minimize the guesswork. This type of analysis can be done in many ways, and that is why you may face conflicting signals while analyzing the price and hence the responsibility of any error thereof lies with the interpreter. There is a possibility of losses, but by honing the skills, one can easily build good money with minimum losses.
Both type of analysis work equally good in examining the forex markets. It depends on you if you feel comfortable trading using fundamental way or technical ways or both. All this is determined by your style and attitude towards currency trading. But before taking a final decision, it is important to go through each of these analyses in detail.