The financial market is quite similar to real life. In real life, in order to navigate through the complexities of the world, we need to have a mentality and a clear cut approach. The same is true for the financial market. Being a chartist is just one approach that certain people opt to have in order to navigate through the intricacies presented to them in the market.
In essence, a chartist is a type of trader who relies upon charts in order to analyze the market. This is another major form of analysis that is usually seen in the market. While they also use technical analysis, chartists have taken this game to a whole other level. Let’s see how.
Who Are the Chartists?
A chartist is a term that refers to a special type of trader. A trader who depends so heavily on the charts and graphs in order to obtain relevant and useful data with regard to the market. And as we mentioned, they naturally employ many different technical analysis indicators in order to analyze the market. But the majority of what they do is to use charting tools to draw up different charts and graphs.
So exactly what a chartist does is that they take technical analysis and they combine it with the visual elements seen in charting and drawing up graphs. Therefore, it is not so rigid as to only include numbers and formulas like the ones you see in technical analysis.
On the contrary. It takes all those numbers and combines them with the graphic imagery of charting.
What Is the Purpose of Chartists?
Many believe that the ideas and notions behind what chartists do are rather extreme. The way you approach the market and the way you maneuver in the market are quite similar to the way you move in life. Some are more extreme, while others might be more moderate.
This approach to market analysis, i.e. being a chartist, can fall on the more extreme end of things. As we mentioned before, their entire focus is on the chart in front of them. As a result, chartists have in their arsenal of analysis, tools and techniques that are related to price movements and trading volume.
Of course, as you know using a limited number of technical indicators would not yield the results that can be depended on. As a result, traders in the forex market who depend on technical analysis for finding their way in the market will use a combination of different indicators.
Using a variety of different indicators can provide results that are more reliable and stronger in their pattern recognition.
Why Use Charts for Analysis?
There are many different reasons as to why a trader in the forex market would choose to rely on charts alone for analysis. One reason is that it is visual and graphically presented. This means there is a visual element to analysis, which is of course absent in other forms of analysis.
In addition, using charts also provides the data in a simple and straightforward manner. It is easily and readily accessible.
At the same time, it is also easy to understand and specify. The information they need or rather the patterns that they need to recognize is right in front of them on the chart.
This is why after a while they might get used to it and begin analyzing the charts habitually. This is another reason why chartists in the forex market go for this form of analysis. Since this analysis is by and large visual, your eyes get used to it. Your mind will learn to find the patterns automatically after a while.
Although, whether these automatic pattern recognition is dependable or not remains to be seen.
What Is the Downside of a Chartist Approach?
There are many different downsides that are associated with the chartist approach to forex trading. Of course this also depends who is evaluating this approach. More serious fundamental analysis supporters would rip into the chartist view easily. But let’s see what the actual downsides are.
One serious downside of the chartist approach to market analysis is the time it takes for it to be fully carried out. You need to remember that while some traders in the market spend their time analyzing charts and going through them, there are so many more competitors who are using more sophisticated methods of doing so.
These sophisticated methods of market analysis will enable them to not just obtain the data faster but more importantly to execute trades much faster and at a much higher frequency.
These advanced methods of analysis include the usage of trading bots and expert advisors. Of course with the help of these algorithmic and automated trading mechanisms, the trading frequency that is obtained is not even comparable to what you would get with a chartist approach to analysis.
Another disadvantage that can be associated with the chartist viewpoint is the fact that the scope of analysis is narrow. While their method might be able to serve them well in certain occasions and be able to bring steady profits, it is definitely the case that they are missing out on some excellent sources for data pertaining to the market.
These, for example, include news events and the release of economic data, all of which can impact the market and change the trajectory of price movements.
Fundamental Analysis: Standing Opposite to Chartists
There is a philosophy of analysis that is standing quite opposite to chartists. And that is fundamental analysis. Those who believe in fundamental analysis also believe that chartists are wrong in their belief in obtaining market data only from charts and graphs.
They believe that the only way to accurately analyze the market in a dependable way is through fundamental analysis. It is also their assumption that every single market is heavily affected by fundamental indicators.
Of course the impact on markets such as the stock market or the commodities can be felt much more directly. But they even make the case that the forex market is more heavily impacted by fundamental indicators.
In a way the forex market is impacted by the fundamental analysis is of course the change the foreign currencies would go through as a result of the economic power and strength of their home country.
This is why proponents of fundamental analysis firmly believe that this form of market analysis is the best one and that it has the most impact on the market. That is how they stand in opposition to chartists.
A chartist in the forex market is a trader who will rely very heavily on charts and charting tools in order to analyze the market and obtain the information required for trade execution. Of course alongside charting tools they rely on technical indicators. While there might be merit to this form of analysis, many believe that a chartist approach is too limited and does not consider other potentially impactful and important factors in the market.