The Hidden Flaw in Your Forex Analysis and How to Fix It

Becoming a forex trader often seems easy, which is why so many people are drawn to it. After all, the forex market offers limitless profit potential, with everyone having the opportunity to earn as much as they can. Unlike traditional trading, forex trading profits aren't reliant on the number of consumers but on individual skills.

However, in reality, becoming a successful forex trader is never simple. Many individuals experience substantial losses and even give up midway. This makes the unlimited potential of forex trading seem futile, as ultimately, few people achieve success in this field.

So, what's the issue? Why do so many people fail?

The failures experienced by most forex traders stem from complex issues. It's difficult to pinpoint the root cause and even more challenging to find solutions. However, one factor contributing to widespread trader failure is that many start off on the wrong foot. They begin by learning classical technical analysis methods, which are products of stock market observation. Forex traders then adopt these methods for the forex market, as if both markets were identical.

Take, for example, the Elliot Wave analysis method. Ralph Nelson Elliott, an accountant and market analyst, developed this method after closely observing stock market price charts, particularly the Dow Jones Industrial Average. Elliott spent years studying historical market data and meticulously analyzing price movements.

The forex and stock markets are two distinct financial markets. Each has its own fundamental factors, shaping unique price movement patterns. Even among forex pairs, there are variations in price movement characteristics. Using analysis methods derived from stock market observations for the forex market is akin to trying to catch fish with elephant-catching techniques—it simply won't be effective.

How do some traders still succeed despite using irrelevant analysis methods?

The effectiveness of classical technical analysis methods is indeed low when applied to the forex market. However, that doesn't mean they are entirely useless.

Classical technical analysis can still be used in forex, but with certain limitations. Some methods might be more effective only on specific currency pairs or timeframes. When applied to other pairs or timeframes, their effectiveness significantly diminishes.

Successful traders, even those relying on classical analysis methods, usually identify pairs that suit their chosen methods. They focus their trading on these specific pairs, avoiding others, even though they have the freedom to do so.

Furthermore, successful traders often modify the classical analysis methods they use to varying degrees. Some even overhaul them entirely or use them in reverse. They have come to realize that using these methods differently can yield better chances of success.

How to find a suitable analysis method?

To determine the compatibility of your analysis method with your chosen trading pair, the only way is through backtesting. You must track the method's performance using historical price data for that specific pair. This will help you understand your odds of success when using that method on that pair. It's impossible to know this without backtesting.



Another option is to develop your own analysis method by observing the historical price movements of a particular pair. This is not a simple task, but if you're dissatisfied with the probabilities offered by classical technical analysis, it's the only viable option. Of course, you cannot escape the backtesting process. Whether you use classical technical analysis or create your own method, you must backtest before applying it.

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