What Forex Technical Analysis Really Is
What Forex Technical Analysis Really Is
and why fundamental analysis is not so relevant to a technical trader
Technical analysis or technical trading is becoming more and more popular among the traders. In a nutshell technical trader is simply looking for as many VISUAL reasons at the same time to BUY or to SELL.
He seeks these answers (reasons to enter) in the PRICE ACTION itself (observing charts). So a technical trader is making decisions based on charts, observing price action and has a profitable trading setup/pattern which he follows a day in and day out. But he could also make trading decisions based on a FUNDAMENTAL ANALYSIS.
The reason why so many traders are interested in technical analysis is that technical analysis is much simpler than fundamental analysis and to be honest with you, a lot of people is not passioned about economics, finance, markets, including me.
Now you might be shocked and are asking yourself “how are you profitable forex trader then if you don’t follow the news? Doesn’t each trader does that? Isn’t that the main thing of trading, to monitor the news, follow the numbers and speculate?
The answer is no, it is not.
You trade however you want…There is nothing wrong or right in trading. The only important thing is to see if your way of trading works for you or not. Simple as that!
Does it make a profit in a long run or not? And if you exclude fundamentals from your analysis then fine.
I haven’t made any trading decision based on an any fundamental in the last 5 years. Believe it or not.
“Technical trader is simply looking for as many VISUAL reasons at the same time to BUY or to SELL.”
He seeks these answers (reasons to enter) in the PRICE ACTION itself (observing charts).
Why is that?
It was a big day for me, very early in my trading career when I realized that all the fundamentals are already calculated in the price action. So if people reacted to the non-farm payroll positively, then we saw that on a price action, on the candles!
Here was the big AHA MOMENT!
Many times it happens also that the specific news is positive for a specific currency but the reaction from traders is negative. So once I have seen that many many times the whole hype around the news completely lost my interest.
You can’t trust the numbers, you can only rely on the reaction to the numbers and you see that on the price action.
IT IS A HUGEEEE, you might not get it yet, but it is mind-blowing reveal…
Why is that?
We are human beings and we are full of emotions. Fear, greed, panic, joy, optimism, etc…
And the reaction (CLOSED CANDLE) is the only reliable indication/sign what is going on EXACTLY AT THAT MOMENT with price action in the market.
Example: Strong bullish Daily candle pattern on EUR/USD, for example, tell us the following, “The whole world (all traders/investors/banks/…)in that day were mostly buying”. (no matter the news announcements and numbers during the day)
This is why a deep understanding of price action will actually tell you what kind of emotions and decisions the whole world was doing at a specific point in time on a specific trading asset (pair).
Let me explain even further!
What counts more?
When does your friend say to you “I have a 10.000$ trading account” or when he actually shows you his 10.000$ trading account? It is the same with news.
Numbers are just numbers, but the reaction to these numbers is the REALITY!
So when you understand that you will simply exclude the news from your trading and focus on avoiding them.
That means for trading 4-hourly, Daily and Weekly timeframe, of course, if you day trade then news are the issue you have to deal with each day. And this is why I left scalping and day trading. These numbers had no meaning at all, they were just putting stress on me. I believe you are observing the same.
So why so many technical traders use and follow the fundamentals?
- They are passioned about the economics, finance…
- These numbers are entertaining…
- They think they need to follow the news in order to become a profitable (it is not true)
- They are day traders and are forced to follow these
- They have found an edge combining technical and fundamental analysis
If you want to be a technical trader, don’t bother yourself so much with the numbers because price action in front of you is the answer. If you want to become a scalper or day trader you will have to avoid this kind of a news with full accuracy, but if you want less stressful trading, trade daily and weekly timeframes. Just avoid trading day before NFP and rate news and that is it!
The news are calculated in the candle patterns itself. But still, if you feel the urge to follow the news and economics, then you have to make it clear, why and how you use fundamentals and why and how you use technical analysis.
I would suggest that you focus purely on price action but use fundamentals just to see if the numbers are confirming the direction of the price action or they are going against it and adjust the risk-based of the combination.
Final word: I deeply believe in simplicity and numbers are not making our trading simple, they complicate it a lot. Think about how you can make your trading strategy simpler!