Of all financial instruments traded, forex may be the best suited for technical analysis for a number of reasons:
1. Forex exceeds all other markets in trading volume. Forex trading has grown some 2,000% over the last three decades, rising from barely $1 billion per day in 1974 to an estimated $2 trillion by 2005, so there is plenty of turnover to produce liquidity.
2. Forex markets never close during the trading week so there is no build-up or backlog of client orders overnight or pent-up reaction to news stories hitting the market at the open. This means no gaps that can create instant losses (or gains) for those holding positions overnight. The trading week begins in Sydney, Australia, on Monday while it is still Sunday in North America and Europe and ends in New York on Friday afternoon so you can trade in the middle of the night or whenever you want.
3. There are two basic types of markets: trending and trading-range markets. It is far easier to make money in trending markets. Currencies tend to experience longer-lasting trends that can continue for months or even years. This makes them ideal vehicles for trend-trading and breakout systems and explains why chart pattern analysis works so well in forex trading. With such widespread groups playing the game around the world, crowd behavior plays a large part in currency moves, and it is this crowd behavior that is the foundation for technical analysis tools and techniques.
4. Due in part to its size, Forex is less volatile than other markets. Lower volatility equals lower risk. For example, the S&P 500 Index trading range is between 4% and 5% daily, while the daily volatility range in the Euro is around 1%.
5. Forex is an ideal market for the “intermarket” method of market analysis developed many years ago by respected industry professional Louis B. Mendelsohn. Trading veterans know that markets are interdependent, with some markets more heavily influenced by certain markets than others.
