With the increase in copy trading and its profitability, many novice traders question the relevance of technical analysis in forex trading.
Both technical analysis and copy trading are viable forex trading ways. They have created many millionaires, whether in the long or short run.
The most straightforward answer to which trading form is better is none.
Here, you will find out types of and how to use technical analysis and copy trading. Lastly, the article focuses on the strengths and weaknesses of each method.
Reading it will enable you to find out what works to enable you to earn reliable income from forex trading.
What Is Technical Analysis?
Before understanding technical analysis, you should find out why analysis occurs in forex trading. The primary reason for forex analysis is how the forex market operates. So, you can decide when to buy and sell currency pairs profitably.
The headache in understanding the forex market is that it is one of the most volatile financial markets. The challenge comes because many factors affect currency pair prices. The factors are social, political and economic.
There are three analyses to track the market changes. These are sentiment, fundamental and technical analyses.
Sentiment analysis entails monitoring other traders’ opinions and trading relative to it. Fundamental analysis involves studying why prices change.
On the other hand, technical analysis studies historical charts and uses the data to forecast when currency pairs’ prices may change. It is often referred to as a data-driven approach to forex trading.
Types of Technical Trading
Tools used to determine technical analysis are called technical indicators. There are four main types of technical indicators. These are momentum, trend, volume and volatility indicators.
Momentum indicators show the rate of price change. Trend indicators echo path price are likely to follow depending on past behaviour.
Volume indicators show the buys and sales in a period. Volatility indicators show the currency pairs driving in a direction.
There are several subdivisions of technical indicators, the main types being:
- Stochastic oscillator.
- Moving average convergence divergence (MACD).
- Bollinger bands.
- Relative strength index (RSI)
- Fibonacci retracement.
- Ichimoku Kinko Hyo.
- Average directional index (ADX).
Advantages of Technical Indicators
The importance of technical analysis results from weaknesses of sentiment analysis. The core weakness of sentiment analysis results from the fact that it is addictive since it relies on emotional trading.
When you abandon other analyses and fully trade from other traders’ opinions, you will likely lose control of your trading decision. This is called noise trading.
Conversely, technical trading enables you to buy or sell currency pairs within a framework. You find out how prices and volumes changed in the past.
After deriving the relationship between change and behaviour, you can decide when to invest or harvest your profit.
Disadvantages of Technical Analysis
The weaknesses of technical analysis are that sudden economic changes such as recession usual disrupt the pattern. Subsequent changes may not obey the past pattern.
Also, most technical indicators show weaknesses in trending markets. You have to combine many of them to be effective.
Worst yet, calculating various technical indicators may be hectic if your mathematical skills are poor.
These weaknesses lead to the rise in copy trading.
What Is Copy Trading?
Copy trading is closely related to sentiment trading. However, instead of making a personal decision after hearing from other traders, you mimic their trades.
The first form is called mirror trading. Here, your broker lets decides expert whose strategies have been profiting.
Through automation, the broker sets machines to monitor the trader’s buys, take profits, stop-losses. And fix yours exactly as the expert.
Copy-trading is when you tell the broker whose actual trades to reflect. Lastly, social trading is when the broker gives you a platform to interact with real traders, discuss strategies, grasp their actual trades and use them.
Strengths of Copy Trading
The main advantage of copy trading is that when an expert generates profit, you earn as well. You do not struggle to do tedious calculations, like in technical analysis.
Use technical analysis if you want to trade profitably while understanding the forex market. Use copy trading when you want to ride the success of other traders without understanding the market.