Technical analysis is a very
powerful tool to observe the movement of a currency and make plans of trade
accordingly. The technical indicators remain same for all the traders around
the world at a moment of time so why are it so that different people have
different fortunes in forex. It is because that technical analysis just gives
us some data and every trader interprets that data in his own way. For instance
if a trader is a buyer he may see an indicator which tells that buying would be
profitable and likewise with a seller, while in reality that may not at all be
the case.
Technical analysis can prove of
great advantage if used properly but despite its many advantages it does have
some limitations too. The fact that currency in reality can sometimes move
contrary to what the technical indicators predict is the biggest limiting
factor that prevents technical analysis from being perfectly reliable.
Political Sentiments
In any country there are many
political events that keep on going, some times these political events also
affect the image of a country or its economy. These geopolitical events in-turn
also have effect on the movement of a currency. For instance, when Iran intensified
its nuclear program, it had a negative effect on USD or the successful test by
North Korea of its nuclear weapon helped the yen to move higher in value. The
actions of international communities like UN, G7 and OPEC also have effect on
currencies. These factors are often not included in technical analysis so the
actual movement may differ from the predicted movement.
Natural Disasters
It goes without saying that
disasters do not only cause loss of life and property it also simultaneously
hits the economy and currency value. The currencies which are commodity linked
are particularly more sensitive to natural disasters. For example earthquakes
in Japan or tsunami in Asia-pacific or any other natural disasters that affects
supply chain results in currency showing unpredictable movements.
Economic Situation
Economic statements or views
about economic stability of a country can influence the value of its currency
in Forex. The factors like GDP report, employment figures, or Fed announcements
are crucial in drawing the economic picture of a country. Sometimes the
speeches made by central banks members also play a role in currency movement.
Internal Turmoil
If there’s an internal turmoil in
a country the news about it goes out in the world and influence traders’ decisions and thus make currency movement different
from that predicted by technical analysis. Countries linked with commodities
like oil or gold are more sensitive to this type of fluctuation. Internal
conflicts in one country can sometimes also cause change in the movement of
currency of some other country.
Acts of terrorism
Acts of terrorism
Other than the normal day to day
life of people, the acts of terrorism also affect currencies. The 9/11 incident
can be taken as an example, which caused the USD to plunge dramatically. Such
events are very unfortunate and affect every currency where they hit.
