| Countless numbers
of investors, large and small, have been attracted
to the foreign exchange market by the prospect of
making a fast buck.
To make their speculative trading decisions,
these investors often use fundamental factors
such as current economic performance (trade balance,
gross national product, unemployment rate, interest
rate differential among underlying currencies
etc.) and also some future expectation of these
factors to make their speculative trading decisions.
How well have these worked to make money consistently
in the past? What about the future? The straight
forward answers are: “Not very well in the
past and not in the future. “
The foreign exchange market is one of the largest
and also most volatile markets in the world with
an average daily turnover of over US$ 1 trillion.
Price
quotes fluctuate almost constantly with dominant
interbank traders who follow the dollar’s
movement virtually tick by tick. Their job is
to make price moves or create volatility in order
to benefit from these moves. That’s why
dollar can rise one and a half yen (150 basis
points) against Japanese yen in a day and then
fall two yen the next day without any news on
fundamental reason.
The use of technical analysis, a method of studying
price action based primarily on price and the
trading volume, is very useful and can very often
give reasonably good results in predicting future
price movement. The purpose of technical analysis
is to identify a trend in its early stage and
to trade in the direction of that trend. “The
Trend Is Your Friend” advises every speculator
to follow just that.
Because of the size and volatility of the global
FX market, technical analysis is the best tool
to apply in this so called “perfect market”
where there are many willing buyers and sellers
at all times and no single large play (even a
central bank) can have a long lasting impact in
this market.
The virtue of technical analysis is its simplicity
of analyzing just one major element, “the
price action”. The logic behind this is
price action discounts everything, because everything
(i.e. economic & political factors, market’s
psychology, both expectation & reaction) has
been reflected in the price itself.
Technical analysis is very powerful method of
forecasting, as the analyst is not influenced
by prevailing market sentiment and he can make
a more objective judgment of which way and how
far the price is likely to move in the future. |
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