Forex trading - technical analysis importance

There are 2 main approaches or methods to forex trading; they are technical analysis and fundamental analysis. This article will discuss the relevance and importance of technical analysis.

Technical analysis essentially looks at the past performance and history of a given forex currency. It is reliant upon statistics and data to determine history, trends and patterns which indicate future market activity. Technical analysis essentially ignores the markets feeling or value towards a currency, and bases decisions solely on statistical data.

As the forex market is reasonably straightforward (minimal variables in comparison to the stock market) it lends itself quite well to technical analysis. The history of the value of currency pairs is a matter of statistical data and can be easily determined and understood. Supporters of technical analysis claim it is the only true way to understand where the market is heading, and predict the next crucial trend. Further to this there is the belief that without technical analysis it would be near impossible to understand or predict where the forex market is heading, and to act upon anything other than instinct.

Essentially the more data you have access to, the greater the probability of making an informed decision in the marketplace. With recent developments in forex trading software, the management of this statistical data has become extremely efficient.

To further understand the difference between technical analysis and fundamental analysis take this example of 2 people buying ice cream. The person favoring fundamental analysis would enter the ice cream store, and try 5 different flavors of ice cream to determine the intrinsic value of the ice cream. The person favoring technical analysis would sit outside the store monitoring who was purchasing which ice cream, and base his decision on that.

Conclusion

Obviously it will in the end come down to preference over which method of analysis you rely upon more heavily in your forex trading ventures. Technical analysis should be your first consideration to gain a broader understanding of market history and market predictions.