Why Technical Analysis Works Well in the Forex Market

If you are considering currency trading in the Forex market, or if you are already involved in Forex currency trading, here is a money lesson we can borrow from investors who use technical analysis to help them make investment decisions in the stock market.

The purpose of performing technical analysis when currency trading is to forecast profitable movements of currency pairs by analyzing price trends. The principles of technical analysis in the stock markets are the same as those in Forex currency trading markets. In fact, the only real difference between the two is that the Forex market is open 24 hours a day while the stock markets are not.

This means that certain analyses that take periods into consideration will have to be adjusted for Forex currency trading. In addition, any of these common forms of stock technical analysis methodologies can be used when trading forex currency:

Elliott Waves — Developed by Ralph Nelson Elliott, this methodology is based on the theory that market performance can be predicted by studying wave patterns that develop over a while.

Fibonacci Studies — Developed by 12th-century mathematician Leonardo Fibonacci, this methodology is based on the theory that changes in trends can be predicted based on prices interacting with lines based on certain sequences of numbers.

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Parabolic SAR — Developed by J. Wells Wilder, this methodology is based on examining prices against “stop and reverse” (SAR) numbers that indicate entry and exit points for a trade.

Pivot Points — A mathematical formula used to determine when to exit a trade based on the numerical average of the high, low, and closing prices.

As I mentioned earlier in this article, the key difference between technical analysis in the stock market, and technical analysis in the Forex currency trading market, is the fact that you can engage in Forex trading 24 hours a day, seven days a week. This key difference is also the main reason why technical analysis works so well in currency trading.

For technical analysis techniques to produce maximum results, extended periods must be available for patterns to develop and repeat. Because the Forex market never closes, and currency pairs are traded 24 hours a day, definable patterns develop more quickly and the technical analyst has a plethora of Forex currency trading data available to work with.

Because more data means more accurate forecasting results, technical analysts can see better results, in a faster time frame, when they combine technical analysis and Forex currency trading.