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Forex Trading Education - Why Traders Use Technical Analysis

Jul 7, 2008
Until just recently fundamental analysis, or looking at past events to help predict future price movements, is how most traders arrived at trading decisions.

Fundamental analysis requires a trader to absorb lots of different information from lots of sources and it takes considerable knowledge to interpret it accurately.

Combine this with some basic disagreements as to what type of information is important and you can begin to see why this method took enormous resources and time - two character traits not commonly associated with the individual investor.

The result was that for many years currency trading was almost exclusively the domain of large banks and other financial institutions with the resources to accomplish this complex type of analysis.

Now Currency Trading Is Available To Anyone Willing To Learn

More recently the rise of computer technology and power and the increases in electronic information sources lead to a fundamental shift in the way many traders analyze the Forex market.

Today most traders will use an automated form of analysis known as technical analysis. It involves combining the charting of real-time and historical price movement data for the targeted currencies. Today this is quickly and easily accomplished using computers which have the ability to do the sometimes complex math in near real-time.

What technical analysis really boils down to is simply taking the one hundred plus years worth of recorded historical price data available from the foreign currency market and running it through a computerized charting application to look for patterns and trends.

Once these patterns are discovered they can be quantified and judged in there ability to predict particular price moves in a given direction. Once that is done a trader can begin to look at a currency's current price movements and compare it to similar past patterns to predict the future direction of movement.

So, while technical analysis does require skill, experience, and judgment the fact that it is more automated and less subjective than fundamental analysis drives it's popular adoption. It is likely that the debate over which method is best will never be resolved, but because of it's widespread use most traders must think that technical analysis is more accurate and easier to master.

Training Is The Most Important Factor

A large majority of traders today rely almost exclusively on some type of technical analysis to inform their currency trading decisions - and yet no system, whether based on fundamental and technical analysis, can accurately predict price movements every time but a good technical trader who takes the time to learn a sound methodology can do quite well.

Technical analysis can never substitute for basic fundamental knowledge. Every successful trader knows that their ability to use analysis is directly related to the level and quality of training they have received. That's why it is so important to find a coach and mentor who can train you in the proper application of analysis and teach you proven Forex trading strategies.

Just as a professional athlete like Tiger Woods rely on the right coaches, the best Forex traders constantly train and seek out coaches and mentors who can help them become and remain successful - and you should also!
About the Author
Winston McCafferty writes about investing and early retirement. If you're looking for a powerful way to generate wealth or just want to improve your Forex trading with solid Forex training then you should attend a FREE "Forex Trading Strategies" Webinar hosted by the The Trading Institute.
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