Trading Forex is tricky.
It is even more trickier to close your trades in profit. It doesn’t happen by mistake.
It takes a lot of effort, dedication and more to be able to come out averagely profitable talkless of making a higher-than-average profit.
Most newbie traders who just jump into trading, or lack adequate experience, tend to regret sooner rather than later as they end up blowing their accounts.
One major way that almost all traders use and utilise to try out the market is technical analysis.
They use this to try to read, understand and predict the market.
“However, is this effective?”
“Can it beat the market?”
“Can it make your trades profitable, or it’s just another shiny distraction to capture the attention of traders looking for the Holy Grail or silver bullet to hit it big in their first trade?”
The answer to the question is YES.
Technical analysis, when used right, can beat the market.
However, what most people consider to be technical analysis doesn’t cover half of it.
For technical analysis to be effective in your Forex trading, you have to know what technical analysis is, what it entails, and how it can help you beat the market.
Key Takeaways
- Technical analysis can beat the market when used correctly.
- However, success also depends on factors like fundamental analysis, risk management, and emotional discipline.
- Combining technical analysis with other strategies like fundamental analysis and risk management enhances profitability.
WHAT IS TECHNICAL ANALYSIS?
Technical Analysis can be defined as the use of trendlines, patterns, indicators and historical price charts to predict where a currency pair might be going.
It is like looking at the market through a microscope or magnifying glass, this is an attempt to see the future direction of a currency pair by observing everything possible about it; past charts, price movements, and regular patterns.
Technical analysis can be compared to a team doing due diligence before a match by watching their competition’s previous matches and analysing their formations for each match, predicting which formation they are going to use in the next match and how to counter it.
The main and final goal of technical analysis is to make the trade taken after profitable. As smooth as butter.
A BRIEF HISTORY OF TECHNICAL ANALYSIS
Technical analysis has a very old and rich history dating way back to the 17th when Dutch traders used charts to track prices.
Then Homma Munehisa in Japan made a great development in the history of technical analysis; candlestick chatting.
Then came Charles Dow, Ralph Nelson Elliott and Richard D. Wyckoff, each making immense advancements in technical analysis.
Therefore in the middle of the 20th century, technical analysis blew up and became prominent in trading, stock trading to be precise but with the rise of personal computers, technical analysis spread into other types of trading including Forex, crypto etc.
WHAT DOES TECHNICAL ANALYSIS ENTAIL?
To be able to rightly predict the price directly of the market, through the recent historical data, certain key elements must be in place.
If not, you are just gambling and not trading. They include:
1) Charts and Patterns:
Charts are visual representations of price over time, and they are the most important part of technical analysis.
Using terms such as “head and shoulders”, “double tops/bottoms” etc, traders use them to seek out trends that they can use to predict future trends.
In other words, if this is X, then we should be expecting Y.
2) Support and Resistance Levels:
Every currency pair has two levels that the price finds it very hard to go either above or below.
These points serve as the resistance and support points respectively for the currency pair.
3) Trend Analysis:
Not every trade is about predicting a new direction, some are just about predicting how long a direction lasts and joining it for the ride.
This is exactly where trend analysis comes in. As the name implies, the trader uses this to analyze the overall trend of the market, whether it’s in a downward, upward or sideways movement.
4) Volume Analysis:
Another way to find out the strength of a trend is the amount of trades taken on the trend.
This influences the quick rise of the price, and can also serve as a future indicator for the continuation or end of the trend.
5) Candlestick Patterns:
Traders also focus and pay attention to candle stick patterns, as they offer insights into what the market sentiment is.
HOW CAN TECHNICAL ANALYSIS BEAT THE MARKET?
It is time to answer the main question.
Let’s be very sincere. Markets are unpredictable.
You can have all the charts and graphs in the world and things would still go awry.
Just because you were able to identify a double bottom doesn’t mean your trade won’t hit rock bottom.
This is why to become profitable and stay profitable in your trades you need more than technical analysis.
Technical analysis is just one weapon in your arsenal of weapons, and to conquer you need every weapon.
Here are six key weapons to be continuously profitable and beat the market:
1) Fundamental analysis:
While technical analysis focuses on the charts and patterns, fundamental analysis focuses on understanding the factors affecting the currencies.
Bank policies, economic issues, geopolitical events, etc that can affect the rise or fall of currencies are considered.
2) Risk management:
One of the most important deciding factors for profitability in trades and beating the market is the ability to manage risk.
Successful traders understand how much they are willing to risk per trade and also use tools like stop loss, take profit etc to limit potential losses.
3) Emotional Discipline:
One way a lot of traders lose to the market is by trading based on emotions.
Emotions such as greed and fear.
This is because trading itself is emotionally tasking, especially when in periods of volatility.
4) Trading plan:
To beat the market, having a well-defined trading plan is nonnegotiable.
The trading plan must specify risk tolerance, entry and exit points and the overall strategy.
This is the only way to avoid trading based on sentiment or emotions and be very focused during trades.
5) Community and Mentorship:
Trading can be very lonely.
It is important that to be successful in trading you must have very good support either in a community of traders or having a mentor.
This won’t only give you support but insights as you would learn from others.
The Forex Mastery Programme provides traders with the best mentorship programme and also has the best trading community of like minded individuals.
6) Adaptability and Patience:
Every successful trader knows that markets change, and what might have been working before won’t work again.
That’s why to be successful, you have to be adaptable, adjusting to the market by changing your strategies.
You must also be able to exercise patience. Patience to adequately wait till all the conditions are correct for an entry and not just take trades based on fear of missing out.
Also, the ability to patiently wait for the trade to reach your mark before cashing out.
This includes the ability to control yourself and not try to catch up to a loss, as not all trades would be profitable.
You can beat the market with technical analysis, however, to continue to remain profitable requires you to have other things to add to it to keep beating the market.
These are what make the 1% of successful Forex traders.
