Technical Analysis
Broadly speaking, traders define the market direction using two approaches, known as fundamental and technical analysis. Technical analysis focuses on the historical prices and charts to predict what might come in the near future.
What is a Technical Analysis?
“Many traders analyse assets based on fundamental aspects like trends, news, events, political support, financial restrictions- which are reflected in the assets prices. Other traders choose to believe numbers, they predict price direction by analysing historical data, past patterns, volume and prices.
Technical analysis guides traders to what might happen in the near future by using past information. Many traders use both technical and fundamental analysis in order to make the best decision possible.
Technical analysis covers a wide range of data and variables, from prices to volume and market capitalization for any asset. It is mainly related to stocks. Its purpose is to bring a taste of the future prices in the present. There are different kinds of charts which need to be analysed to get the information needed to make a decision. Bar charts, lines and candlesticks will provide a wide range of information.
There are also technical indicators, like the most used one, the moving average for different timeframes. There are support and resistance levels, which can be inserted as a line on a chart to show the levels at which the stock price faces a resistance when it is trying to go up, and it is supported to not go lower.
Technical analysis is based on three fundamentals:
1. Every asset in the market will be discounted with the time.
2. Prices move in trends, and the future price goes after the trend.
3. History repeats itself. Same circumstances cause the same reactions.
WHY performing a technical analysis?
Broadly speaking, traders define the market direction using two approaches, known as fundamental and technical analysis. Fundamental approach relies on economic information of an asset, while technical analysis focuses on the historical prices and charts to predict what might come in the near future. Let’s dive deeper in the fundamentals the analysis is based on:
1. Every asset in the market will be discounted with the time.
Technical analysis is based on price movements of the asset, not considering outside factors, since it assumes that all outside factors are already reflected in the price. So, all needed is the examination of the price.
An unexpected event – like a political tension or natural disaster may affect a market or many markets, but an analyst which is oriented by technical facts is not interested in the reason which causes the effect, he is focused on the chart itself, shapes, patterns and formations happening on the chart.
2. Prices move in trends, and the future price goes after the trend.
Technical analysis believes that price movements follow certain trends. After a trend has been established, the next price movement is more likely to be the same as the trend, than against it. Many technical analysts base their decisions on this concept.
There are many different techniques to identify the trends, but like weather forecasting, technical analysis doesn’t take into consideration all the possible influencing factors. Instead, technical analysis provides investors with what is likely to happen with the price directions in the future.
3. History repeats itself. Same circumstances cause the same reactions.
The keystone of technical analysis is the idea that history repeats itself. Technical analysis uses historical prices data to forecast the future prices. Charts tend to form certain patterns that tend to repeat under the same market pressure.
This is highly connected to probability and analysis of historical patterns, which create certain arguments of why and how the price will move on.
