Image by Chris Liverani

Introduction to technical analysis

Fundamental Analysis studies all those factors which have an impact on the assets price of the future, such as financial statements, management processes, industry, etc. It analyses the intrinsic value of the asset to identify whether it is under-priced or over-priced. On the other hand, technical analysis uses past charts, patterns and trends to forecast the price movements of the asset in the coming time.

Technical analysis is the study of historical price action in order to identify patterns and determine probabilities of future movements in the market through the use of technical studies, indicators, and other analysis tools.

Technical analysis boils down to two things:

  1. identifying trend

  2. identifying support/resistance through the use of price charts and/or timeframes

Introduction to technical analysis

Essence and history of technical analysis, basic methods of technical analysis, graphical methods of technical analysis (levels, reversal figures, continuation figures), trend indicators (moving averages, MACD, ADX), oscillators( RSI), Candle Stick

 

  1. Essence and history of technical analysis

  2. Basic methods of technical analysis

  3. Graphical methods of technical analysis (levels, reversal figures, continuation figures)

  4. Trend indicators (moving averages, MACD, ADX)

  5. Oscillators( RSI)

  6. Candle Stick

  7. Elliott wave analysis

Essence and history of technical analysis

Technical analysis — a popular way among traders to predict the behavior of the price of an asset in the foreign exchange market. Technical analysis is based on the belief that price changes that have occurred in the past are inevitably repeated.

Confirmation of previously recorded patterns in the behavior of the market is sought through the analysis of price charts, during which certain graphic figures are identified, interpreted as signs of a possible price movement in one direction or another.

The central position of technical analysis is the assertion that prices take into account everything. That is, there is no need to monitor and analyze economic news, since all of them are already reflected in the price, just look at the chart. The logic in this case is the following: if the market makes figures (price values) from information, then there must be a possibility of the reverse process of obtaining information from figures (prices).

Price forecasting on the basis of technical analysis is based on the data (results) of previous trades, the most important of which are:

- prices;

- trading volumes.

History

There are two approaches to understanding the history of technical analysis. The first of them is based on the opinion that the technical analysis originated in the United States and, accordingly, is a creation of Western thought, while others believe that the technical analysis originates in the East. Let's briefly consider each of these versions.

The first mention of the possibility of forecasting future price movements based on the results of previous trades appeared in the late XIX century in the Wall Street Journal. This was a note already notorious Charles DOE-creator of the now popular Dow Jones index. The theory created by Dow exists to this day and is called: "Dow theory". The method developed and improved until the 1970s. With the advent of computers, it became easier not only to count, but also to display calculations in a graphical form.

According to the second approach to understanding the history of technical analysis, it originated in ancient Japan. While Columbus didn’t even think of discovering America, the first prototypes of stock exchanges in which rice was traded existed in Japan. And the Japanese traders, trying to predict the movement of prices, drew the Candle Stick with chopsticks on the sand, looked for their specific combinations, which were repeated and predicted the price changes of rice.

Basic postulates of TA

1. Movements in asset prices include all factors. 

2. Prices move in a directional manner. This means that price movements aren't random and move in a certain direction. Directional movement is called a trend. There are three types of trends: bullish (upward movement), bearish (downward movement) and flat (prices move in a certain range).

3. History repeats itself. This postulate is based on the existence of patterns - typical structures that reflect the price dynamics and occur from time to time. Their existence is associated with the peculiarities of human psychology.

As additional, they also distinguish:

- indexes must confirm each other - any trading signal has to be confirmed (generated) by signals from other indexes (indicators).

- trading volume should confirm the trend - trading volume should increase in the direction of the main trend.

- trend exists until obvious signals appear, it has changed.

 

A characteristic feature of technical analysis is its applicability to prices in all types of markets. In commodity markets, technical analysis is just as applicable to the prices of gold, oil and natural gas as far as coffee and sugar prices are concerned. In financial markets, you can also successfully work with rates of different currencies, as well as with different indices. In fact, any process, on the graph of which the trends are viewed, can be analyzed by methods of technical analysis. 

Basic methods of technical analysis

There are three different approaches to analyzing price charts. The first is superficial, subjective. It is based mainly on intuition. It doesn't require any rigorous analysis or justification, so most traders work at this simplest level. Unfortunately, they sacrifice logic for the sake of simplicity and convenience.

The second approach is related to the creation of market indicators that help determine trends, oversold and overbought market conditions, price deviation from equilibrium, etc.

The most effective and valuable is the third approach - the development of trading systems that can generate signals for buying and selling. However, not all analysts have a sufficient level of education, experience and the desire to constantly sharpen their skills.

 

The main methods of technical analysis include the following:

Graphical

levels;

graphic figures;

candle analysis;

Mathematical

- Analysis using average

- Trend indicators

- Oscillators

Elliott Wave Theory

best-Forex-trend-indicator.png

To learn more, contact us.

1587396430_elliott-wave-forex-trading-with-the-elliott-wave-theory.jpg
How_to_Trade_with_Stochastic_Oscillator_body_Picture_1.png