When learning about technical analysis, understanding why it is important can provide the motivation to understand the basics in a more comprehensive way. While the importance of technical analysis varies from market to market, the currency markets seem to be especially influenced by them.
All the Cool People Are Doing It
The very first reason that technical analysis is important is the simple fact that so many traders study it. While there are a lot of magical indicators and systems out there, or at least claims of them being so, the truth is that some parts of technical analysis probably work simply because so many people believe they do. It is a bit of a “self-fulfilling prophecy”.
At its core, technical analysis measures where supply and demand meet. In other words, where there are more contracts of a financial instrument available than the amount wanted, or vice versa. The very fact that a good technician can identify where large amounts of order are coming into the market will give them a “heads up” on where they may want to be involved in the markets. Even those traders who shun technical analysis will often have a general idea where these major areas are.
One of the most common forms of technical analysis is Fibonacci based. The mathematician Leonardo Fibonacci discovered during the Renaissance that there is a natural order of repeating numbers in nature, from the rivers to the mountain tops. There are many crops that will reproduce using these ratios, and they can even be used to measure human features. Suffice to say, someone got the idea of applying these percentages to a chart, and the Fibonacci retracement tool was born. Is there any magical significance to these numbers that makes for a better trader? That is hard to tell, but the very fact that so many people believe in it makes the levels seem to work over time. If enough people believe in something, it eventually becomes so.
Ignoring Your Inner Voice
Another reason to look at technical analysis before placing a trade in the Forex market is because it will help reduce the urge to trade based on your gut reaction, which a common way in which traders lose money in the Forex market, and a bad Forex trading habit that is hard to break without an alternate solution.
The realm of technical analysis includes many different types of indicators. Some measure the strength of the trend, while others will measure momentum as related to the current move. The field is very wide and varied from trader to trader, but the reality is that a lot of large firms hire technical analysts to help with their trading strategies. With this in mind, you have to understand that there are a lot of large players out there that at the very least are paying attention to the technical and who are trading accordingly, which means it’s probably a good idea for you to do so as well.
One thing that most traders would be well advised to take into account: technical analysis is a great way to look at the markets and to predict the trends, but it is simply a tool and not the only form of analysis that a trader can use. Most technical traders will also use a bit of fundamental analysis and perhaps even news analysis to line up the best trading opportunities. However, there is a something to be said for the idea that all available news is present in the charts, and technicals focus on the “what” instead of “why” a pair will move a particular way. At the end of the day, that is what matters, not the hypothetical economic arguments. Price is everything, and this alone is why technical analysis matters.
