Below are five ways in which technical analysis shows its imperfections. These unpredictable events can cause currencies to move in unpredictable ways for a few hours, an entire day, or even a month or longer. The currency could move just long enough to hit the trader’s stop-loss order, thus closing a trade. Or it could cause a complete trend reversal, lasting for weeks or months.
Sometimes, these events will cause currencies to move in your favor; sometimes not. The important point is that currencies can move contrary to what the indicators predicted -- and every trader has to be prepared for these events.
How Can Technical Analysis Fail?
Below are the five ways that technical analysis can fail.
Any geopolitical event can move currencies. News that Iran intensified its nuclear program fueled the fall of the USD last April, 2007. On October 9, 2006, North Korea tested its first nuclear weapon, which moved the yen to triple-pip gains for a day. Elections, OPEC decisions, and G7 statements can also move currencies.
Any economic news can cause currencies to move. Some of the most market-moving economic reports are the employment figures, Fed announcements (or even speeches made by central bank members), GDP report, and the manufacturing survey .
Earthquakes in Japan, drought in Australia (affecting wheat production), tsunamis in the Asia-Pacific region, or any natural occurrence that affects commodity supply can move currencies contrary to the technical forecast. Commodity-linked currencies like the Australian Dollar (AUD) are particularly sensitive to natural disasters.
Acts of terrorism
Any act of terrorism can affect currencies. The Sept 11, 2001 attacks pushed the USD quite dramatically downward. The terrorist attacks in London in July, 2005 also moved the European currencies, particularly the Pound (GBP).
Internal Conflict or war
Any conflict can affect currencies, particularly in countries with commodities linked to oil or gold. Internal conflicts flaring up in oil-rich Nigeria can move currencies like the Canadian Dollar (CAD) and the US Dollar (USD).
Is Technical Analysis Useful in Currency Trading?
Absolutely. In fact, a trader must have at least a basic understanding of technical analysis to trade currencies effectively. This basic knowledge includes understanding simple moving averages, Bollinger Bands, and oscillators. With these three tools, a currency trader has the best possible tools available for profitable trading.
A more studious approach to technical analysis will improve your trading ability and manage your risk more effectively.