• December 9, 2022

Strengths and Weaknesses of Technical Analysis

Technical analysis encompasses the evaluation of historical price movements in a bid to predict the future movements of prices. Successful forex trade relies on the analysis of the underlying factors influencing the trade.

Technical analysis is essential. It enables the traders to remain alert in the event of a particular price trend. Also, it aids in the prediction of future price variations.

Technical analysis has benefits and drawbacks, which forex traders ought to be conversant with for sound decision-making. The following encompasses the strengths and weaknesses of technical analysis.

Strengths of Technical Analysis

1.      Simple

Price trend charts illustrate the association among numerous variables, plus the outcomes of the associations. The price changes form an interconnection that traders have to analyze before they can utilize in decision-making. Technical analysis transforms the somewhat complex interconnection into an easy-to-understand price history chart.

Drawing, showing, and reading the price charts is even easier with electronic devices such as computers. Furthermore, electronic devices make the programming of the technical analysis charts to the software easy.

That improves the accessibility of the charts to every financial market trader. The charts can reflect almost instantly provided the requisite data is entered correctly in the software.

2.      Objective

Unlike fundamental analysis, technical analysis is objective human feelings or emotions cannot influence it. It has no room for personal feelings.

The signals you observe, be it the buy or sell signals, are what they are. The traders cannot manipulate it to operate by their will or feelings. That makes technical analysis more dependable when it comes to trades’ decision-making.

3.      Flexible

Technical analysis embodies great pliancy. Financial market traders can apply technical analysis to any financial market. The traders can employ it in the forex, futures and forwards, and any other trading medium.

Also, technical analysis is time-flexible. That means it has no limit as to the period it can analyze. The same principle of technical analysis utilized to examine a short period can apply to a lengthy period of over a hundred years.

4.      Definite

Technical analysis is specific with the signals it communicates. You will observe some apparent signs on the price charts, intended to convey where the changes may occur on a trend.

For instance, there are the double bottom patterns plus the head shoulder top patterns. The high level of confidence technical analysis offers sets you ready to carry out trades.

Weaknesses of Technical Analysis

1.      Invaluable for prolonged trends.

Technical analysis’s primary focus is on short-term trades. You can quickly analyze the short periods’ trends of variations in the forex prices.

On the contrary, the financial market traders can analyze the longer period trends through the observation of major eternal factors. For instance, political situations, policy formulations, plus capital market dynamics best suit the analysis of long-term trends.

2.      Uncertainty of the purchase plus selling signals

There is substantial uncertainty with respect to the buying and selling prices. The uncertainty can be attributed to the great distance between the purchasing and vending signals and the coverage between the topmost and lowermost prices.

The uncertainty often results in poor decision-making by the traders. Most traders are often slow to decide based on technical analysis because of its uncertainty.

3.      Uncertain price plus time

Technical analysis does not provide an exact point where the price will change in the future. It can only forecast the trend, but it cannot pinpoint where the prices will rise or fall. Also, it cannot give an exact estimate of the duration of the trend.

4.      Time lag

Forex trading necessitates a quick reaction. The predictions can only work for you if you are quick to implement them. Sometimes the signals may delay and consequently make traders slow in making decisions. Thus, by the time the traders act, the prediction may already be historical. Hence, technical analysis is helpful if decisions are made quickly.

Conclusion

Technical analysis is beneficial for very active forex traders. If you are unsure of the future price movements, technical analysis provides you with future trends. It also signals you when to buy or sell a stock. Hence, knowing the strengths and weaknesses would be of great advantage to caution yourself against uncertainties.