The random walk theory states that one day’s price is completely independent of the previous day’s price. Relating this theory to the Forex market would translate by saying that a currency pair, such as GBP/USD, is not affected at all by past performances or price charts, but rather is determined by an efficient application of supply and demand.
There are a number of problems that are created by the random walk theory. For one, multiple studies have shown that simply paying attention to support and resistance lines can improve a trader’s fare when trading stocks. Whether it is a self-fulfilling prophecy or not does not matter. A large enough amount of traders pay attention to technical indicators so that these technical indicators can be successfully applied to currency trading.
Because the majority of currency traders look at technical indicators such as support and resistance levels, the prices of currencies will often reflect the action that they expect from them. Think of it this way: when enough people believe that something is going to happen and then they act like that something is going to happen, in the currency market this is usually enough to make that something actually occur.
This is what makes technical analysis so powerful. Even if the signals generated were originally not effective through the TradeForgeFX Review, they are now because enough people believe that they are effective. In this regard, technical analysis is more than just a look at price and history’s effect on price. It is a look at the collective psychology of all traders involved.
{ Comments are closed! }