numerous—even though this science is relatively new. Their numbers grow
every day, along with implantation of these revolutionary ideas into the
arsenal of the vast majority of currency speculators. The founders of technical
analysis (such as John Murphy) stated that technical analysis could
become the only tool to forecast market movements and completely replace
fundamental analysis. The number of publications on this subject has
evolved, and now, even beginners can freely discuss head-and-shoulders
formation. Technical analysis enjoys wide popularity among traders. Any
computer software dealing with financial markets includes lots of indicators
and other tools for technical analysis.
Technical indicators are used as the basis for the development of the
majority of trade strategies and systems. Many traders skilled in mathematics
try to optimize existing indicators and oscillators, as well as to develop
new ones. The so-called black and gray boxes, which are, in essence, software
with input trade algorithms, are based on these technical elements.
However, not everything is so clear and unclouded in technical analysis.
The main difficulty of technical analysis is an uncertainty that allows interpretation
of almost each specific market situation in several different ways.
Besides, the basic elements of technical analysis widely used in everyday
work do not behave the same way as they were described in textbooks
and publications. This way, the market prevents every
trader (who has read the textbook and learned the scientific fundamentals)
from profitable trading on the financial markets. Difficulties arise when
technical analysis is used in daily short-term trading because of minor market
fluctuations that, in essence, are just the market noise. This noise can
be compared with radio interference hindering clear reception. Unfortunately,
the amplitude of this interference is too high to be ignored in shortterm
trading, and it disturbs the market harmony.
Paradox
The forecast on markets with a minimum number of technical traders
among other participants is much easier. For example, daily plots of the
DJIA, NASDAQ, and S&P indices often provide a technical picture that is
close to ideal and easy to understand. However, stock-market traders traditionally
prefer fundamental analysis, and the percentage of technical
traders is still not sufficient. The FOREX market, filled with technically
skilled speculators using the classic technical analysis tools, becomes
more and more difficult to forecast.
Let us now look at the advantages and disadvantages of the main elements
of classical technical analysis and select the most important elements,
considering specific trade signals they send to traders.
Read More : ADVANTAGES AND DISADVANTAGES OF TECHNICAL ANALYSIS
