CHAPTER 4
Technical Analysis and the Forex Market
Why have so many former equity and futures traders chosen to trade in the currency markets? Many have discovered that technical analysis works exceptionally well in the forex markets, and are reaping the benefits of trading in the global marketplace. Why does technical analysis work so well in the forex market? Technical analysis is simply the analysis of past price movements to help predict future price movements. In many cases, a trader using technical analysis is simply looking for the repetition of past occurrences.
This chapter explains how traders use this technique to optimal effectiveness in the currency markets.
THE THEORY BEHIND TECHNICAL ANALYSIS
Long-term movements in the currency market generally correlate with economic cycles. These economic cycles tend to repeat themselves, and so they can be predicted with a reasonable degree of accuracy. Repetition is the key, since the entire premise of technical analysis lies in using historical price movement to predict future price movement.
In the stock market, the fundamentals of a particular company can change radically in a short period of time. This makes past stock prices irrelevant in the prediction of future movement. There is no predictable economic cycle in the life of a company or in the life of an individual stock. As a result, technical analysis becomes a hit-or-miss proposition in the stock market.
In the forex market, we are trading the economies of entire ...
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