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Sunday, 10 October 2010

Forex Technical Analysis And Pattern Recognition

There are two mainstream approaches most traders take when they trade the forex market. There are in essence two types of traders. The fundamental trader and the Forex technical analysis trader. This latter trader is what this article is about.

While the fundamental trader typically watches the news and takes cues from world events to enter a trade, the technical trader believes, that by the time news breaks and the world hears about it, all the smart money has already made its move and the news is always too late. This would indicate a belief that there are insiders in the Forex market that take advantage of events and their privellaged positions to profit from moving markets. I cannot confirm nor deny this belief and by all means if it was true, it would be a violation of FTC guidelines.

The technical analysis trader believes whether rightly or wrongly, that studying the actual price fluctuations of the market and looking for patterns in the history of that price movement, a "tech" trader can see a move BEFORE events hit the headlines. However, there is an old traders adage, and it is virtually disclaimer on every trading product known to man. It goes...

Past price history does in no way guarantee present and future behavior.

I did not get the wording 100% correct, but it's meaning completely de-legitimizes technical analysis trading. Just about every technical analysis software program and even broking houses will have this type of disclaimer somewhere on their literature. It means, "even through we use price analysis or are selling a product that automatically plots entry and exit signals based on past price behavior, we disclaim that it will actually work at all" In other words, if this system or software or what have you, actually lets you get a winning trade, it is primarily luck and not a result of our system.

This can be very disconcerting to a new trader with stars in their eyes. Luckily, a good system does not have to be perfect. I have heard of a trader that uses a coin as a system. He also does the opposite of what the coin says. Believe it or not, he is right 7 out of 10 times using this odd approach. With that sort of strike rate he is raking in a fortune, but the point is that it works for him.

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