Technical analysis, just like fundamental analysis, can be a
very useful approach to the market. If done properly, you can earn huge
profits. Of course, you’ll have to master all technical tools and indicators
first. That equals to tons of study time and work.
Moreover, while it’s not as ‘technical’ as others think,
it’s still not a walk in the park. This means that you’ll have to spend time
and energy to learn the ropes.
It also sports disadvantages that could derail your trading
tactic. If you overlook these disadvantages, you’ll probably end up being
buried in losses from the currencies you trade.
Let’s take a look at some of the disadvantages of forex
technical analysis.
Subjectivity
Many critics of technical analysis say that its nature if
purely subjective, which is particularly right. In addition, it takes skills
and it’s an art in its own way.
Since it’s not a strict science, even those experienced
technical analysts can encounter disagreements. They may not come up with the
same assessment and predictions based on the indicators and tools they used.
Also, traders have biases and expectations, which can
heavily affect their judgment of what they see on the charts. The proper entry
and exit timing would also be reason for disagreements. Some of them would
enter a continuation pattern, then trade it without any touch of option. Others
will just wait for the pattern to be complete.
Overall, the approaches to technical analysis vary from
analyst to analyst.
Information Noise
Just as it is subjective, technical analysis can also be
full of information noise. Meaning there will be false signals or exaggerated
assumptions. What may seem to be a good time to enter the market may in fact
turn out to be nothing of importance.
Traders can become very anxious and ‘noisy’ about a predicted
movement that it becomes pure noise. This is difficult to avoid since you are
involved in the analysis, making you believe what you see at the moment.
The fix to this problem is simply increasing the number of
indicators you use in the market. Each tool and indicator can be used for
specific functions, and the more you use them in combination, the more you can
make accurate predictions.
Time Lag
When you’re doing technical analysis, fast reaction time is
very crucial. The market moves quickly and continuously, and missing an
important movement may translate to humongous losses.
When that happens, you typically cannot get the opportunity
once more. And even if the same movement happened, tons of other changes have
already taken place, making the market not as ideal as before.
This also affects the trader’s psychology, making him or her
much too careful and too conscious of market movements. This leads to
confusion, which is never good for a trader and his or her trades.
Read further: 3 Forex Trading Risks to Consider
Conclusion
When picking an approach to the market, you must consider
not only the benefits that you may get from it, but also the disadvantages that
you may have to endure. Technical analysis has been proven to work. But it has
also been proven to have some shortcomings. It is imperative to have a working
risk management strategy.
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