The whole mechanic of Forex Trading hinges on two pillars: the Fundamental Analysis and the Technical Analysis. Technical analysis remains the most scientific technique for optional effectiveness in the currency market. Technical analysis is simply the analysis of past price movements to help predict future price movements. The application of technical analysis is mainly looking for the repetition of past occurrence. In contrast, the fundamentalist theorised that at the background of all price changes are economic indicators such as interest rate and national income. A successful trader must however embrace both concepts.
The Long-term movements in the currency market generally correlate with economic cycles. These economic cycles tend to repeat themselves and so they can be predicted with a reasonable degree of accuracy. If the application of economic analysis cannot predict price movement and fundamental indicators are not reliable, one must prudently avoid trade in view of the enormity of risk. Repetition is the key since the entire premise of technical analysis lies in using historical price movement to predict future movement.
Those who continuously record losses in Forex trading are the very ones with blurred vision vis a vis trend and stochastic analysis.
Generally in the forex market, one is trading the economies of entire countries. The fundamentals of these countries change very slowly, making the boom-bust nature of the economic cycle easier to predict. The above provides the explanation to the application of statistical or quantitative models such as moving averages, relative strength index, standard deviation, MACD, stochastic oscillators, parabolic SAR etc. for trend analysis and for clinical prediction.
THE ANATOMY OF A TREND
Trading with the trend is one of the most profitable stochastic methodologies used to trade any market and it is particularly effective when trading the Forex market. This is because the Forex Market has a tendency to form strong trends that can last for long periods. Statistically, one could also avoid trading in the event of no foreseeable trend to avert unnecessary losses. Trend analysis as a foundation of prediction therefore remains a tool throughout the life of Forex Trading.
By Prof. Akwasi Ampofo Twumasi