Disadvantages of Technical Analysis

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

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.