Technical analysis relies on the assumption that all information is already reflected in the price of a security, which means that analysis of that price is all that matters. By looking at price patterns and statistics, technical analysts try to gauge the market’s overall sentiment and determine where prices may be headed.(more…)
Indicators represent a statistical approach to technical analysis as opposed to a subjective approach. By looking at money flow, trends, volatility, and momentum, they provide a secondary measure to actual price movements and help traders confirm the quality of chart patterns or form their own buy or sell signals.(more…)
Chart patterns can be difficult to read given the volatility in price movements. Moving averages can help smooth out these erratic movements by removing day-to-day fluctuations and make trends easier to spot. Since they take the average of past price movements, moving averages are better for accurately reading past price movements rather than predicting future past movements. (more…)
There are millions of different investors transacting billions of dollars’ worth of securities each day and it’s nearly impossible to decipher everyone’s motivations. Chart patterns look at the big picture and help to identify trading signals – or signs of future price movements.(more…)
There are four primary types of charts used by investors and traders depending on the type of information they’re seeking and their desired goals. These chart types include line charts, bar charts, candlestick charts, and point and figure charts. (more…)
Forex technical analysis
As we already know, Forex traders use two types of analysis in their work: fundamental and technical. While fundamental analysis attracts those who believe that price movement depends on economic and political indicators, technical analysis is used by traders who are confident that a trend can be predicted – and all forecasts may be built in accordance with historical and economic data. Each kind of analysis has its pros and cons, but in this article we will tell you about all aspects of technical analysis.
Technical analysis was created by Charles Dow (1851-1902), who was the first editor of The Wall Street Journal. In 1890s, Dow published several articles, in which he shared his observations and suggestions about the stock market. Soon, his ideas formed the basis of the Dow Theory.
After Dow’s death, traders all over the world started developing the concept of Forex technical analysis. Over time, technical analysis began to be used not only to predict the movement of stock prices, but also to predict changes in currency quotations. The invention of computers had a greater influence on this process.
The key point of Forex technical analysis is the ability to analyze charts. It is believed that the chart represents all significant factors that affect the market. So anyone who thinks that technical analysis is the most reliable and accurate way to analyze the market, consider the following statements as axioms:
The price is affected by everything.
According to Dow, everything that happens in the financial markets has already been taken into account in a price chart. At the same time, the price does not change by chance – its movement is a result of all actions of all market participants.
Prices follow trends.
An existing trend will continue rather than change its direction. Prices move in a certain direction, until a reliable sign of a turn arrives. This is why inexperienced should not trade against the trend.
History repeats itself.
If some signals in the past showed that the price movement would change, then the similar signals in the future will also show these changes. The technical signals that worked 100 years ago are still effective today.
Technical analysis for beginning traders
In technical analysis, there are three different types of charts: linear, bar and candlestick chart. The most popular and informative today is the chart of Japanese candlesticks – it is effectively used by millions of traders all over the world.
For technical analysis, computer indicators can be used – they allow you to quickly and easily get acquainted with the current price movement. Yet, there are traders who do not use indicators – they believe that indicators make the analysis more complicated. This sort of analysts only look at the price and evaluate the patterns formed on the chart.
The logic of technical analysis is as follows: each Japanese candle (bar, point) on the chart is an expression of the opinion of millions of traders. This is exactly the balance of supply and demand at the moment. Market participants “vote” for the further direction of price by opening deals. They buy if they believe that the price will rise, and sell if the price is expected to fall. If market participants are not sure – they do not open deals, and the price does not move at all.
However, technical analysts never try to understand the reasons why the price moves up or down. It is much more important for them to assess the mood of the market and understand market players’ behavior. To do this, it is enough to see how the quotes change.
Advantages of technical analysis:
This type of analysis is much simpler than the fundamental one. Even if you get the freshest trading information about daily, you cannot take into account all the factors affecting the market. Since technical analysis examines only price changes on charts, it is not difficult to master this skill.
A huge number of people believe that technical analysis is the most beneficial. And these people are active players in the market. They use the very same charts, get almost identical results and draw the same conclusions. Such co-operation has a strong influence on price movement – as a result, their forecasts often correct.
Technical analysis can be used in various financial markets.
Does technical analysis work?
Technical analysis is a very useful tool for “reading” the chart and selecting the opening and closing points. It increases your chances of making an effective deal in the market. However, it is impossible to predict the price movement and to be sure that these forecasts are true – technical analysis may bring you bad results if you blindly believe everything you see in the chart.
Knowing the basics of technical analysis is a necessary component of trading – but not limited. The financial market is a multifactorial, complicated and interesting model that should be observed in a complex with fundamental factors. The more experienced trader you become – the more effectively different methods of technical analysis will work for you.