Why Most Forex Traders Use Technical Analysis
If not Technical analysis? What then? The flip side of this is known as Fundamental analysis? You need to know the difference before understanding why most Forex traders these days use technical analysis.
Fundamental analysis relies on a more instinctive feel for the Forex market aligned with copious experience over many years of trading. Without wanting to generalize too much, traders who apply fundamental analysis have been in the business for a long time, long enough to have seen consistent ebbs and flows in different currencies and to know which factors will determine their value.
Before the average punter was able to dabble in the currency markets, Forex trading was only available to major banks and we all know how conservative banks are. Decades of experience provided a wealth of information and a clear idea on how currencies would behave in whatever the current climate of the day. Additionally, computer technology was unavailable so fundamental analysis dealt more with observation, gut feel, and copious record keeping.
The mainstream advent of computers into the trading world meant that numbers could be keyed in, jiggled around within defined parameters, and spat out to reveal the most likely path to success. The most basic way to understand one major reason why most Forex traders use technical analysis these days is to use the illustration of the calculator. Our grandparents and great-grandparents had to rely on their brain matter to come up with answers to complex sums. Our generation is trained to use calculators and computers.
Technical analysis is mathematics and statistics-based. It deals with past performances of currencies and uses technology to analyze future expectations.
Technical analysis is believed to be more accurate because it is based on cold, hard facts but when all's said and done, there's no 100% fail safe way to predict the currency market's movements. Technical analysts feed historical price data into a computer which then provides information on patterns that have occurred over more than a century of foreign exchange trading. These patterns are compared with real time movements and predictions are made.
Today's young guns of Forex trading take advantage of training courses and mentors to learn how to perform complicated technical analysis. The highly experienced stalwarts continue to rely on fundamental analysis because it's what they're accustomed to and frankly, there is no reason to stray off a proven path.
Another reason why most Forex traders use technical analysis is because it's tangible and easy to track. It provides facts and figures, not information that can be interpreted one way or another. That means it enables traders to enjoy uniformity in the information they can use and it creates somewhat of a level playing field.
Technical analysis is also easier to learn than fundamental analysis which takes years of experience to grasp. Considering the influx of young professionals into the area of Forex trading, it's not hard to understand why computers are so heavily involved. Raised on a steady diet of computer technology, instant gratification and easy acquisition of knowledge, this generation has taken to technical analysis with gusto.