Many experts are of the opinion that technical analysis is more effective in forex trading than in stock or futures trading. The reason for this is that the forex market is more predictable with active intervention of central banks to keep their currency exchange rates within a certain range. Moreover, the continuity of the market decreases overnight price uncertainties and trade gaps, which makes technical analysis more easy and effective. World forex market is so far the most liquid financial market on the world with daily transactions reaching more than three trillion US Dollars, so the uncertainty because of high price volatility is also less in forex market.
The effectiveness of a forex technical analysis system depends on many factors like the sophistication of the trading system, trader's knowledge, trading time-frame, profit target, the currency pairs trading, etc. Developing a good forex technical analysis system can take some time and effort. Developing a sound technical analysis system for a beginner trader can be a tough task. Here are some tips for developing a good system.
Sticking to Popular Currency Pairs: Popular currency pairs have well established price ranges. These are interlinked too, so that the price change of one pair can cause price change of other pair(s). These currencies have high daily trading volume and liquidity helping traders to closely monitor price changes. On the other hand, when traders trade least traded currency pairs there can be high irregularities and noise in trading systems which in turn can reduce the effectiveness of technical analysis process.
Sticking to a Handful of Indicators: Too many indicators can backfire, especially when you are new to technical analysis. Studies shows that simple indicators like moving averages and logarithmic returns better than many sophisticated and complex indicators to analyze present and past market conditions and to predict future trends. Additionally using too many indicators as once can create confusion on trader minds and can slow-down the analysis process.
Following Swiss Franc and Japanese Yen: Many forex experts believe that Swiss Franc and Japanese Yen are most predictable currency pairs because of their central bank interventions on currency trading market. Thus beginner traders can limit their overall trading risk and can also sharper their technical analysis knowledge by following currency pairs having one of these currencies.
Using Neural Networks for Trading: There are many models of neural networks available there in financial market. Studies also proved that these are most effective in analyzing and identifying obscure patterns in data. Thus are believed to be highly suitable for currency trading than most other financial instruments trading.
