| A lot has been written about the effectiveness of | | | | creating a double top pattern) or swing low (double |
| technical analysis in trading. The academic community, | | | | bottom). |
| for instance, has not accepted technical analysis as a | | | | Another commonly seen phenomenon is a support |
| scientific discipline. Fundamental analysis supporters | | | | line turns into a resistance line and vice versa. Here is, |
| also refuse to recognize it as a valuable trading tool. | | | | for example, the GBP/USD 4H graph of May 19, 2008 |
| And still, technical analysis is the most common used | | | | (link to illustration graph is at the end of this article). |
| approach to trading, especially when it comes to | | | | See how the red resistance line turns into a strong |
| forex trading. The liquidity and versatility of the forex | | | | support. |
| market make it a paradise for "technicians". Technical | | | | Is this a mere coincidence? Probably not. The mass |
| analysis is also the basis of many automated forex | | | | first identified the red line as a resistance area and |
| trading systems. The question is whether technical | | | | promptly after the resistance has been penetrated, |
| analysis is indeed the right way to trade the forex | | | | the same line remains and becomes support. So a |
| market? | | | | critical mass of traders gave this line exactly the |
| Well, I think that a good forex trader should know | | | | same meaning (first - resistance then- support) and a |
| every aspect of trading, and that includes | | | | "collective mind" has been born. This "collective mind" |
| fundamental analysis. Economic forces influence the | | | | is now keeping the spot above the support, at least |
| relatively strength of each currency and it is essential | | | | for a while and long enough for smart traders to |
| to be familiar with them. At the same time, technical | | | | identify the opportunity and exploit it for making |
| analysis, which focuses on the price (in forex- the | | | | money. |
| ratio between two currency pairs) is also important | | | | Graphs always tell us a story. We only need to |
| at least for one major reason - it reflects the state | | | | understand the psychology of the crowd behind |
| of mind of the mass in every given moment. For | | | | them and act accordingly. It is not an easy task. |
| example, support and resistant levels actually create | | | | Some say reading the graphs is a combination of art |
| a psychological area. When support or resistant level | | | | and science which takes years to master. All true, |
| is penetrated, the psychological barrier falls and the | | | | but by trying to understand the psychology of the |
| mass push the market in the same direction (up or | | | | mass one can gradually develop a habit of being |
| down). In many cases, the price is stopped exactly | | | | always one step ahead of the herd. |
| at the level of a previous swing high (potentially | | | | |