- In trading, the price of an asset holds the most importance.
- There are three main types of price analysis methods.
- Each method has its own pros and cons.
The price of any trading instrument is the first and foremost thing where you pay the most attention. The current price reflects the consensus between buyers and sellers.
Is it possible to make forecasts and take positions only based on price dynamics? The question has no clear answer. But what we are sure of is that the more reliable information is taken into account, the more reasonable the conclusions are.
Over the centuries, humans have come up with many methods for analyzing the behavior of currency prices. Here are just a few of them:
- Candlestick analysis
- Graphical analysis
- Analysis with indicators
Let’s take a quick look at each.
This is one of the first few methods of price analysis. Using the candlestick method, price dynamics are represented with four reference points that include open, high, low, and close at any time instant. Then, these candlesticks are analyzed, candlestick patterns are identified, and forecasts are made.
Benefits of Japanese Candlesticks:
- Visibility of displaying the movement of changing prices
- The ability to analyze the psychological state of market participants.
Disadvantages of Japanese Candlesticks:
- Subjectivity in the analysis of candlestick patterns
- Low efficiency of patterns
Studies show that the predictive efficiency of candlestick patterns fluctuates around 50%.
Therefore, we believe that it will be advisable to use Japanese candlestick patterns for trading in financial markets only in conjunction with more advanced techniques, such as the Elliot Wave method or Volume Spread Analysis.
Price Action Analysis
This type of analysis consists of plotting various horizontal, inclined and vertical lines on the price chart. Various figures (patterns of graphical analysis) are obtained from which trend lines, channels, resistance, and support levels, and various figures are obtained.
The advantages of this method are:
- Ease of use
- The ability to predict important price levels for market participants.
Disadvantages of Price Action analysis are:
- Subjectivity in the construction of lines and levels,
- Difficulty in the correct interpretation and application of this method in trading.
Analysis with Indicators
You can use several custom and built-in technical indicators to predict the price movement. These indicators are based on statistical and mathematical models.
Benefits of using indicators are:
- Indicators work themselves. There is no need for a trader to plot lines or patterns.
- Indicators can be easily tested on historical data.
Disadvantages of indicators are:
- All indicators are lagging.
- Indicators working in the past may not perform well in the future.
In the article, we discussed which Forex chart patterns are highly effective. Thus, we can say that some of the components of graphical analysis have grounds to build a trading system on them. But it will be better if you add more methods/filters to increase the final performance.