Forex Technical Analysis - 4 Costly Mistakes to Avoid

by : Steve Todd

If used correctly, forex technical analysis can make you huge trading profits. Look at any forex chart you’ll see trends that repeat themselves. These trends can be traded for profit. However, its not as easy as it seems – which is why 95% of forex traders lose money.

Here are the four most common mistakes that cause the majority of traders to lose money:

1. Forex Charts can’t Predict the Future

Many traders believe that technical analysis can predict the future – but they’re wrong. Think about it - if technical analysis could predict the future, then we’d all know tomorrow’s price today - and there’d be no market. Currency prices move due to a difference of opinion - and of course, if we all had the same opinion, prices wouldn’t move!

There are several theories, and currency trading systems, that claim they can predict prices with scientific accuracy when forex trading. These include: Elliot wave theory, and trading systems based on the Fibonacci number sequence. Don’t fall for them - they don’t work!

2. Using Time Spans that are Too Short

Trading is not scientific – it’s an odds game. The aim of technical analysis is to get the odds on your side - and for this you need to work with valid data. This means having enough data to calculate the odds. Generally, you need at least a few weeks’ data - preferably several months’ data.

The biggest mistake you can make, is to fall for the myth of forex day trading. To think that it’s possible to calculate the odds in a day, or less, is laughable. Yet, more novice forex traders try day trading, than any other method - and they get wiped out. If you think that you can make money executing trading signals in day trading, try to find a day trader who’s made money in the market. Real money - not a hypothetical track record – good luck on your search, I doubt you’ll find even one.

If you base your forex trading strategy on day trading, say goodbye to your money!

3. Not Using Confirming Indicators

Many traders, when using technical analysis, like to buy into support, or sell into resistance levels - and hope they hold. Do this and you’ll lose money. Why? Because you’re trying to predict prices, by hoping and guessing - and the market will wipe you out.

If you want to trade the odds, use momentum signals to time entry to your trades - so you trade with price momentum. For example, if you were selling into resistance, you’d only do so if price momentum turned down below support. This way you’re not hoping – you’re trading confirmation of price weakness - and the odds.

If you don’t use momentum indicators in your forex strategy, you won’t have the odds on your side.

4. Using Too Many Indicators

Many forex traders assume that the more indicators a forex trading system has, the better it must be - after all, 10 indicators must be better than 4 – wrong!

It’s a fact that simple systems work best in currency trading - as there are fewer elements to break. All you really need is technical analysis - to help you determine the price trend, support and resistance - and a few momentum indicators.

You don’t get rewarded in forex trading for being clever - you get rewarded for being right with your trading signal - and the best way to do this, is to keep your forex trading system simple.

The above technical analysis mistakes, are commonly made by the majority of forex traders. If you want to enjoy currency-trading success, avoid making these mistakes - and you’ll be on your way to making bigger FX profits by using technical analysis correctly.