For any trader, a critical step in developing effective trading strategies is choosing an analysis method that evaluates charts and potential trade opportunities.
Chart patterns and indicators offer different approaches to evaluating markets, with each presenting its own relative strengths and weaknesses. Although some trading experts are staunch advocates of one over the other, many traders do use a combination of these methods to create their own customized trading strategy.
Here’s a look at the benefits and drawbacks of each school of thought.
The Case for and Against Chart Patterns
One of the benefits of chart analysis is that it can enable faster, informed trading decisions based on changes in the market. Pattern evaluation uses past and real-time trading activity to forecast potential opportunities, based on historical data and general patterns that tend to repeat over time. Using chart patterns is far from an empirical study of trading activity, but it can still offer a lot of information in terms of price movement and action on a currency pair.
The downside of these patterns is that, while the patterns do appear time and again on forex charts, trading decisions based on this information are ultimately more of a judgment call than anything else.
This can be a good thing if you have experience, but if you’re just starting out, chart pattern analysis could be risky, since you don’t have the experienced eye needed to analyze chart patterns on their own. For beginners, it can be helpful to use other sources of insight alongside chart pattern analysis to either corroborate or contradict your judgment about a price’s likely movement.
The Case for and Against Technical Indicators
Technical indicators offer a more empirical approach than chart patterns, relying on data points widely believed to be reflective of a market’s future performance. This data’s reliability has also been demonstrated time and again when used to evaluate trades in the past, offering some measure of credibility to new traders.
Unlike the gray areas that come with evaluating chart patterns, technical indicators tend to offer black-and-white guidance regarding trades: Either the indicators suggest a high-value trading opportunity, or they don’t. For traders seeking a more analytic approach, they can be a useful assessment tool.
But technical indicators have their flaws. Although history has shown these data points to be reliable predictors of future trends, those results are never guaranteed in any one instance. Data points used as technical indicators can potentially overvalue one type of data at the expense of other data that affects trading values. And some technical indicators have a stronger historical backing than others, meaning that certain indicators used for trading purposes may involve greater risk than others.
Which Approach Works Best for Forex?
Forex traders sometimes use candlestick, head-and-shoulders, and Ichimoku patterns to identify good trading opportunities. The ideal chart patterns depend on the kinds of patterns you prefer for evaluation as well as your ability to read and analyze these charts.
For many beginners, for example, the head-and-shoulders and triangle patterns are simple, effective ways to quickly analyze charts. Ichimoku patterns, on the other hand, are better suited for a more experienced eye.
When it comes to using historical indicators, different patterns can be used based on the types of trading opportunities you’re looking to capitalize on. Filter rules, for example, have historically yielded reliable profits with certain currencies on the forex market. These filter rules instruct traders to buy and sell according to percentage movements in the value of those markets. This can be a reliable way to reap modest gains by following technical indicators during periods of peak volatility.
The key to successfully using these indicators is to always back-test them and make sure they stand up over time. These indicators are designed to predict future activity based on past market data, so if you can’t identify a strong historical basis for those indicators, any reliance on them is closer to gambling than shrewd forex trading.
While the merits of evaluating chart patterns versus indicators has divided prominent experts on forex trading, these analysis strategies aren’t mutually exclusive. Any trader can combine aspects of each method when evaluating potential trade opportunities.
Ultimately, traders should seek out the best combination of patterns and data points to create an analysis strategy that works for them. Experiment with different approaches and combinations until you discover a method that suits your trading strategy and goals.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.