The object of trading in the foreign exchange (FOREX) market, as in any other market, is to maximize profits. Various tools and strategies have been developed for achieving this objective. Traders using indicators to determine how, when and what to trade are said to be relying on “technical analysis”. Can these magical tools help the trader win in every trade executed?
Some of the names given to technical analysis tools like, fibonnaci lines, stochastics, parabolic SAR, bollinger bands, and oscillators give the immediate impression that this type of trading can be intimidating. At first glance, you might even be tempted to think that perhaps an engineering degree is a prerequisite for participation. This, of course, is not accurate. As with most unfamiliar disciplines, all that is really needed is a competent instructor who can motivate students to capture and retain nuggets of knowledge while developing individualized ability to exercise appropriate judgment and requisite skill in a given application. On the slippery road to expertise, an unrelenting commitment to practice that which is learned marks the difference.
It is true that many traders participate quite profitably in the FOREX market without utilizing technical analysis at all. So then, if these tools are not an absolute necessity for making a profit in FOREX, why do some traders insist on spending bundles of cash to sit under the tutelage of a guru who extols the golden virtues of technical trading? Quite frankly, it is a matter of individual taste and preference.
This author is unaware of any credible studies which conclude that technical traders have more successes in FOREX than nontechnical traders. Ultimately, what all traders dream of is the ability to predict the direction of the market with a high degree of accuracy. A crystal ball, however, is typically not one of the trading tools you will find arsenal of serious traders. Rather, tools such as those delineated above will serve at least as a guide in helping you understand how the market has behaved over a certain time frame. You, as the trader, will then come to an eventual decision, based on the tool’s interpretation of the historical movement, about which way the FOREX market may move next.
Due to the generous number of technical analysis tools and the various methods of applying them, it is difficult to say which ones work consistently better then others. They all bring something unique to the table of the trader’s potential success. This certainly is not saying that they are all without fault. Even if the proper steps in the technical analysis are religiously adhered to, losses are inevitable. Such is the nature of the market. Then too, there is something inherently exciting about winning when someone else is losing in the same “zero sum” game. It somehow makes us feel smarter than the next trader.
One effective approach to trading the FOREX market would be to use a combination of technical analysis and fundamental or nontechnical analysis. For example, when an particular economic news report is about to be released, you might weigh the likely impact which the report will have on the price of the currency pair being traded and then consider the application of the indicators in light of the expected impact.
Trading decisions are made like many other decisions, i.e. on the basis of information available. Therefore, it can be generalized that technical traders prefer and have a need for more information on which to base their decisions. To others, however, only basic information—as long as it is substantive and reliable—is all that is needed to make decision on a trade.
Some traders, over a period of time, develop something akin to a sixth sense about trading, allowing them to recognize profitable setups and avoid potential traps. This can be done with or without technical analysis. This sense will result in minimizing the importance of certain external information which may have been previously relied on.
You must remember not to be afraid to allow your trading style and methods to evolve as need be. If it works for you, that is all that matters.
Sandy Robinson, J.D.
Copyright 2007
If you are ready to change your future by stepping into the exciting world of trading FOREX, go to http://www.winningtradersassociation.com for more information. Author Sandy Robinson, J.D. is part of the Winning Traders Association, an educational organization founded by John Beiler, President. The organization consists of a network of committed trainers and motivated traders willing to provide support to those interested in trading foreign exchange. Many of the members work from home.
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