Forex Technical Analysis
Technical indicators are but one tool that a forex trader uses in achieving and successfully creating their own forex trading system. A simple search of the internet will yield many forex technical indictors; unfortunately, not a single one can accurately forecast the forex market with complete accuracy. More often than not, a trader will be better prepared to achieve success by utilizing more than one technical indicator and performing a forex technical analysis on the results.
Limitations of Forex Technical Indicators
No one forex technical indicator is without flaw; each has its own inherent problem or problems that should at least be recognized, if not understood, especially while you are performing a forex technical analysis. Failure to understand the limitations of each indicator may result in an undesirable effect. Chief among the inherent problems is an awareness that the majority of technical indicators were designed long before forex trading reached the robust, and sometimes quite volatile, level that it is today.
Limitations of the SMA and EMA Indicators
Beyond that, each forex technical indicator will have its own limitations. For example, the Simple Moving Average, or SMA, because it is a lagging indicator does not react to swift market changes and residual price fluctuations quickly enough to be effective. Likewise, the Exponential Moving Average, or EMA, doesn’t adjust to pricing spikes, simply because the forex technical analysis of its data is focused more on older data as opposed to newer
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Limitations of the RSI and Stochastic Indicators
The Relative Strength Index (RSI) High-Low Indicator may signal a Buy or Sell too early, or even give a false read. For example, if your established parameters are met before the anticipated price reversal has occurred, without your careful monitoring of the market events you may be entering or exiting your position too soon.
The Stochastic Indicator, another lagging indicator like the RSI, may also send false signals. A trader must be vigilant and constantly observe the ever-changing market conditions and tweak the Stochastic Indicator settings to minimize the risk of false signals. As with the RSI, market surges opposite to the crossover’s direction might occur in a volatile market, and should the trading window be too broad – time-wise – the trade will be more vulnerable to pricing spikes. Consequently, without vigilance, a trader would be aware too late to correct.
CHARACHTERISTICS OF FOREX MARKET
Perfect market: The foreign exchange market is the largest and most perfect of all markets. It is the largest in terms of trading volume (turnover), which currently stands at over one trillion US dollars per day. It is the most perfect market because it possesses the requirements for market perfection: a large number of buyers and sellers; homogenous products; free flow of information; and the absence of barriers to entry. The foreign exchange market is made of a vast number of participants (buyers and sellers). The products traded on the foreign exchange market are currencies: no matter where you buy your yens, Euros, dollars or pounds they are always the same. There is no restriction on access to information, and insider trading is much less important than, for example, in the stock market. Finally, anyone can participate in the market to trade currencies. Unfortunately, however, its function of exchange rate determination is not very well understood in the sense that economists are yet to come up with a theory of exchange rate determination that appears empirically valid.
Geographical distribution: Unlike the stock market and the futures market, which are organised exchanges, the foreign exchange market is an over-the-counter (OTC) market, as participants rarely meet and actual currencies are rarely seen.
There is no building called the ‘Sydney Foreign Exchange Market’, but there are buildings called the ‘Sydney Stock Exchange’ and the ‘Sydney Futures Exchange’. It is an OTC market in the sense that it is not limited to a particular locality or a physical location where buyers and sellers meet.
Extended hours: It is an international market that is open around the clock, where buyers and sellers contact each other via means of telecommunication. The buyers and sellers of currencies operate from approximately 12 major centres (the most important being London, New York and Tokyo) and many minor ones. Because major foreign exchange centres fall in different time zones, any point in time around the clock must fall within the business hours of at least one centre.
The 24 hours of a day are almost covered by these centres, starting with the Far Eastern centres (Sydney, Tokyo and Hong Kong), passing through the Middle East(Bahrain), across Europe (Frankfurt and London), and then passing through the US centres, ending up with San Francisco. This is why the first task of a foreign exchange dealer on arrival at work in the morning is to find out what happened while he or she was asleep overnight. Some banks and financial institutions may for this reason operates a 24-hour dealing room or install the necessary hardware (Reuters’ screen, etc.) in their dealers’ homes. Others may delegate the task to foreign affiliates or subsidiaries in active time zone.
Liquidity: In view of the huge trading volume in the forex market, under normal conditions, you can buy or sell currency at your desired price in a mere matter of seconds with just a simple click of the mouse. You can even setup an online trading platform to buy and sell (place order) at the right price so that you can control your profit margin and cut losses. The trading platform will execute everything for you automatically. It is fast and simple.
