|Predicting trends in financial markets|
Technical analysis is an advantageous tool which helps traders to predict the next movement of a specific market. These predictions are made based on previous chart patterns, the overall history of the market and specific experiences of traders in the market. As time passes by, these tools enable traders and investors to predict the next movement of the market. However, predicting trends isn’t as complicated as you may think.
Predicting trends vs. foreseeing
Technical analysis is typically known as a dark magic which allows traders to manage their positions. However, something that most ordinary people don’t pay attention to is that traders are not trying to foresee anything. Instead, they try to develop strategies with high success rate. These strategies help traders to predict the future movement of the market.
In fact, the reason why a trader analyzes the market, is to find an entry place to buy low and sell high, or vice versa. In order to do this, you should conduct your own analysis or just follow other traders’ ideas to make the best trading decision possible. If traders were able to easily find these great trading opportunities in the market, they wouldn’t spend so much time behind their computers analyzing trends for long hours.
The power of predicting trends
Traders have their own unique trading policies when entering and exiting trades. Technical traders use special tools such as Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), stochastic indicators in combination with several chart patterns to develop their unique trading strategy. Experienced traders often confirm such strategy as a successful trading strategy. If any unwanted movements occur at the beginning of a certain trade, it shows that the particular strategy responsible for that trade hasn’t worked properly. But if the trend corrects, there could be hope for a successful trade.
The below chart shows a trade on GBP/USD pair. This trade is carried out based on a crossover on the exponential moving average (EMA) to identify the best time to sell or buy the currency pair. The blue line shows a 10-day EMA and the red line shows a 20-day EMA. When the blue line passes over the red line, it’s generating a buying signal, whereas if the red line passes over the blue line, a selling signal is given. In a popular market, this is known as a powerful strategy, since it allows you to follow those who act on these obvious signals. The first arrow shows a false signal, while the second arrow shows a profitable one.
This is where the power of predicting trends comes into play. If a trader had tried to buy on the first arrow, he/she would have lost more than 100 pips. In this case the trader would place his/her stop loss on the long-term trendline to exit the trade before it’s too late, because a reversing trend may occur. In the second arrow on the other hand, the trader would have reached profit in the matter of several days. Placing stop loss would form a robust trading management plan for the trader. Therefore, placing a stop loss below the blue line or the red line would have been great to prevent a frustrating trade. If you tend to actively manage your positions and accept the loss, you would have a better chance than terminating your stop loss right before an aggressive movement in the market.
The above chart shows the difference between prediction and foreseeing. In this case, we anticipate that this trade would have the same result as it had in the history of the market. In addition, this pattern was similar to the previous patterns, therefore, we expect the trade to move in our favor. The question here is that is there any dark magic going on here? The answer is absolutely no. If there was any determination, we wouldn’t have used a stop loss at all. To sum up, this prediction is a combination of probability, luck and anticipation.
By actively monitoring our trade and taking necessary measures, we would eliminate the effect of emotion from our trading strategy. Our goal should be specified before entering the market. Since emotions don’t have anything to do with our goals, we would be able to control our trading when undesirable events happen in the market. Try to minimize the effect of emotion as much as possible, but try not to eliminate it completely. Because traders are human after all, and they are incapable of acting like a robot. Therefore, as indicated in the above chart you can easily note that price movements have a close relation with moving averages. The key point is to develop a valid trading strategy like this and stick to your trading plan.
Having clear goals is the key to survival in financial markets. Technical analysis offers clear and brief anticipations of future movements of the market. But like anything else in life, there are no guarantees for success. With that being said, we should keep our emotion under control by sticking to our trading plan, and then the profitability reaches its highest amount. By gaining experience you would be able to predict the future movements in the market and increase your odds of winning and reaching a higher return in this industry.
For trading in forex or any other global financial market, your first step would be registering in a forex broker. Aron Groups Broker has offered financial services to over 65,000 clients over the world since 2020. This broker offers more than 500 trading instruments in forex, cryptocurrency, energy, commodity and stock markets. You can even start trading with a demo account without risking your real assets, before feeling confident enough to start trading in the real market.
Written by: Mohsen Mohseni (Aron Groups).