Forex Technical Analysis: 2 Easy Mistakes to Avoid

Technical Analysis in Forex assumes a fundamental importance. In fact, it is the activity that allows acquiring a realistic and detailed vision of the market, in order to estimate future movements and, consequently, plan winning trades. However, practicing technical analysis in Forex is complicated, as it is for all other markets. Nonetheless, it is an essential commitment that all traders, professionals and less professional, competent and less competent, are forced to fulfill. Some practices are acquired over time, and only with time can a trader refine his analysis skills. However, right from the start it is possible to avoid some setup errors that can cause problems and expose the investor to significant risks. We discuss them in this article.

Why Technical Analysis is Important in Forex

Before listing these setup errors, it is good to give an overview of the role that technical analysis plays in Forex and the impact it has on profit chances. We have already mentioned the purpose of technical analysis: to understand the real situation of the market, estimate future movements, and allow designing trades worthy of the name. However, it is interesting to investigate the mechanisms that make technical analysis a fundamental tool. The mechanisms almost all have to do with one of the founding principles of technical analysis: the one that states "history repeats itself". This catchphrase actually conceals a fairly consolidated dynamic, which implies a certain predictability of reactions. Given an event X, it is very likely that event Y will follow now. In short, given certain stimuli, reactions tend to always be the same. Obviously, this is an abstract principle which, although it often translates into real phenomena, is sometimes denied by unpredictable events, which, it must be said, "explode" in areas outside the market. Let's think of the famous black swans or, more simply, those events that generate panic or euphoria in the markets. These dynamics can be traced in all markets but especially involve Forex. The currency market, in fact, appears quite balanced in terms of the relationship between market movers and trading dynamics. In essence, prices are the result of investor behavior but also the impact of what happens in the economic, financial, even social and political context. In light of this, in Forex (as in other markets) technical analysis takes on the shape of an indispensable tool for orientation in an environment that, at first glance, can be perceived as unpredictable and imponderable. As already mentioned, technical analysis is not the easiest of activities. It is not for a simple reason: the market is a complex entity, the result of the actions of a multitude of investors and the impact of a very large number of factors. It is therefore not surprising the abundance of practices and techniques that regulate market analysis.

Forex Technical Analysis: 2 Setup Errors

Learning to perform good technical analysis is not a walk in the park. Commitment, a certain intelligence, willpower and a good educational path, whether self-taught or pre-established, are necessary. This is not the place to provide a complete guide on technical analysis. However, we can circumscribe some setup errors that all beginners tend to make and that can be easily avoided. We list them in the next paragraphs.

Using a Single Indicator

The tools of choice for carrying out a good technical analysis are indicators. These are resources capable of extracting certain data from the market and "processing" it so that the trader can draw evidence about the current state of the market itself and future movements. Indicators are almost all the result of modeling, which proceeds from the use of statistical and predictive mechanics. Some indicators are easy to use, others much less so. Learning to use an indicator is quite complicated and requires more than a little effort. For this reason, especially beginners tend to learn to use an indicator and... Stop there. In short, there is a tendency to use one indicator and only one. At first glance, it may seem a prudent choice, of someone who does not want to take a step longer than their leg. However, this strategy has a fundamental flaw, capable of updating more than a few problems and exposing traders to significant risks. The truth is that all indicators taken individually have a wide margin of error. In plain words, they can emit false signals, misleading the trader and pushing them to design failed trades. The only way to avoid false signals or, better said, reduce their incidence is to use multiple indicators. In this way, one indicator can act as a counterproof for the other. A trader who uses multiple indicators is not necessarily smooth sailing, but certainly greatly reduces the risk of encountering fake signals. Very simply, they will only trust the signals that are emitted simultaneously by all the indicators they use. An approach that appears simple but often and willingly "pulls the chestnuts out of the fire".

Complicating Life

If the use of a single indicator represents a substantially wrong approach, the same can be said of the use of too many indicators... and too complicated. Let's be clear, there is no inherently complicated indicator. It all depends on the skills of the individual trader. This does not take away that an overly hypertrophic approach can lead to negative consequences for trading activity. For hypertrophic approach, we can mean the use of several indicators, perhaps belonging to a type that the trader has little grasp of. It may well happen that a beginner adopts multiple strategies simultaneously by virtue of the opinion of some experts, without filtering the opinions through what their needs and real skills are. You risk receiving too many signals that are too discordant. In the best case, the trader will take too much time to analyze the market and design a trade. In the worst case, they will move in the wrong way, taking the classic fireflies for lanterns. The advice is not to take a step longer than your leg and to only use the indicators of which you know the mechanisms and dynamics. Furthermore, the basket of indicators should never be too large.