Technical analysis is a method that helps to generate analytical data from past Forex market history and then use them as the basis of projecting dynamics in near future. It also gives an insight into how different factors like news, events, economic reports and current trends affect the price movement of currencies. Technical analysis involves plotting price charts using mathematical calculations and observing price patterns to predict future movements.
The following benefits will help you understand how technical analysis can be advantageous for your trading:
1) Identifying the Market's Mood and Sentiment: Technical indicators like moving averages, oscillators and MA crossover can be used to determine whether a currency pair is overbought or oversold. This gives an insight into the current sentiment of the market and thus helps you adjust your trading strategy accordingly.
2) Confirming Trading Signals: Technical analysis tools aid in validating signals generated by other indicators or price action patterns. This can prove to be advantageous for both beginning and experienced traders as it reduces risk and enhances profitability. Some examples include:
a) Trading breakouts using moving averages: The 200 SMA (simple moving average), 100 SMA and 50 SMA can be used to confirm market breakouts.
b) RSI Oscillator to validate momentum indicators: Momentum oscillators like the Relative Strength Index based on simple moving averages generate numerous buy and sell signals. The RSI oscillator can be used to confirm the strength of the momentum signals.
3) Better Risk Management: By recording areas where price bounced back in the past, it becomes easier for traders to set profit targets and stop loss levels. This reduces risk and helps maximize profits. An example would be plotting a Fibonacci extension on a reliable support and resistance level.
4) Identifying Market Entry and Exit Points: There are several technical tools that can be used to determine entry points such as Fibonacci retracements, trend lines, breakout indicators and chart patterns. Similarly, there are various methods of determining exit points such as the use of moving averages and Bollinger bands.
5) Helps in Planning Entry and Exit Points: Technical analysis helps in determining entry and exit points with respect to various time-frames like M15, H1, D1 etc. These can be used in conjunction with different monetary units like 100K, 50K or 10K per trade to improve overall profitability.
What tools to use for Technical Analysis?
Meta Trader 5 is one of the most reliable options for executing Technical Analysis in the form of trade signals on Forex trading platforms.
MT5
The third-party technical analysis indicators are available in various forms. Most trading platforms offer customized toolsets while some have ready-made functions for traders to install or copy code from one platform to the other according to their convenience. Metaquotes offers a toolbox of free tools to its clients. MT5 provides a comprehensive list of indicators that can be easily customized or used as they are.
The Bottom Line
There are several benefits of using technical analysis tools in Forex trading, from identifying the market mood and sentiment to identifying entry and exit points. It is advisable for both beginning and experienced traders to use these tools to improve overall profitability.
EmoticonEmoticon