When Technical Analysis Is Your Enemy
Technical analysis is a powerful tool to forecast the price action in Forex market. It is more popular than fundamental analysis in currency trading and is used both by beginning traders and experienced professionals equally. But is it really universal and omnipotent? There are some situations when good old technical analysis can ruin your trading.
News of high importance. When very important economic news are released with the unexpected outcome that greatly exceeds any forecasts, even the most certain technical patterns get ruined. It is a real trading suicide to rely on technical analysis in the chaos that ensues after such news releases. Disaster/terrorism news also tend to affect Forex market in a similar way.
Holidays market. Trading during big holidays (such as New Year and Christmas) is not advisable at all. Technical analysis fails there because the trading volume is extremely low and the market becomes highly unbalanced with large spike movements possible in each direction. Big speculators can forge the market to their own liking during such periods.
Bubble rallies and bursts. When some market gets hyped, it hardly obeys common rules of technical analysis. In Forex, when some currency pair goes up in a bubble-like manner (the carry trade hype of 2001-2007 is a good example), trading on sharp rallies can be very profitable, but do not expect your support and resistance levels to work there.
Remember about situations when playing by technical analysis is dangerous and you will be able to apply it in the right context where your strategy will not be hurt by any force majeure. In Forex, technical analysis can be your best friend — do not let some circumstances turn it into your worst enemy.