This section of TradingAnalysis.co.in is devoted to the basics of technical analysis , that’s the discipline of online forex trading aimed at analyzing the markets that’s done through the study of charts. In this section we’ll talk about the fundamentals , the technical indicators, the study of the charts with a small course also on how to analyze for instance the eur / usd exchange which is what most interests traders.
Trading is first of all a technical discipline so it makes sense to start from the basics and historical data to try to predict future market movements which will help us in trading. The basics of At (technical analysis) may be applied to a whole range of assets or tradable assets ranging from currencies, commodities to stock exchange indices. If you want to invest in the stock market, you definitely need to learn these concepts.
Technical analysis: the definition
With the term technical analysis we’ve seen that we try to make predictions on the future prices of a market by analyzing past data, known as historical data. The prediction that can be made is usually expressed in probabilistic and not absolute terms. In fact, the task of a trader is to know which event can occur, which scenarios an event can trigger to influence the price of a market asset.
It is actually possible to make estimates on both the euro / dollar rate of exchange and the currency pairs and on the stock market indices. The level of study can obviously change over time. The data can be analyzed within a short time window such as minutes and we talk about intraday forex trading UK or on weekly or monthly analyzes.
Theoretical bases and foundations
If we want to find a historical location we must go back to the Dow Theory which in fact established the foundations for what then became the actual technical analysis.
The foundations of this theory are based on some fundamental concepts:
- price movements aren’t entirely random but probabilistic theories may be developed
- the indices reflect everything in the sense that the elements of classic supply and demand are reflected on the stock exchange indices and nz forex brokers site
- how to do it is much more important than why
To clarify the first point, we must start with trends. Analysts often agree that in some periods prices don’t follow a precise trend. If this were all random it might be difficult to trade profitably. It’s therefore assumed that the markets have long periods of volatility and periods during which they have a non-random behavior. For this reason we will try to identify a trend both within the short term and in the long term.
For the second point, generally , it’s believed that the current price of a market good fully reflects all the information that’s available on that security. Information that’s available to analysts, banks and investment funds. For this reason, the index reflects all this amount of information and can be interpreted to understand more about the future.
If you think about it then the vision of the technicians is based more on the how than on the why. For the technical analysis it’s important to know what the price and the historical trend are. The approach, in a certain sense, is extremely direct and is opposite to the fundamental analyzes which also try to understand why the price is simply that. They carry in external events like news to try to understand this, this is not what the chart analyst cares about. In the end, if you think that about it, if anyone is willing to pay for a title, you don’t understand why you should understand why.
Course: how to do technical analysis
Analyzing charts can be complex but also easy at the same time. In the next chart we see an example on stocks.
There are some aspects that we’d like to identify:
- Trend: it’s necessary to identify what is the general trend of the stock. It’s a type of study that is done with averages or trend lines.
- Supports: represent those price levels where a downside block occurs
- Resistances: they indicate the areas of price congestion where the rise stops. A break that occurs above the resistance points can be thought of as an uptrend
- Momentum: is an indicator that indicates the rate of change of the price and is usually measured by MACD.
- Relative Strength Index (RSI): represents the relative strength indicator or a gauge of market excesses. The price is represented by a line that tells us whether for a period of time the level is exceeded and is rising or falling.
When the graphs are available, attention must be paid to some aspects:
- Understanding the strength of the current trend
- Analyze the level of risk
- Understanding what the potential points of entry into the market are
Credits: Images by Forex Trading Australia via www.australiaforextrading.com
To understand if the trend is strong or not, one must understand what the final goal is. If this is to predict the future price then you would like to focus the analysis on price movements to try to know the future. For this reason, many analysts focus on 3 to six month analyzes to spot a trend. It can happen, however, that there are jolts and sudden reactions.
If there’s a strong demand this implies that there will be a price increase as the lower prices reflect a higher supply. The support and resistance levels should be identified on the chart. In general these are characterized by periods during which prices move in small ranges or intervals over a long period. This tells us that supply and demand are stable, in practice it’s stopped. If, on the other hand, the price moves out of the range, one of the 2 has began to take over.
Even those who use fundamental analysis can use charts because they’re more intuitive and easier to read. In fact, it’s easy to spot reactions to important events directly on the chart or past and present volatility or to identify the strength of a stock in the market. The study serves precisely to know what’s the correct entry point into the market.
In conclusion, we will say that for a technical analyst it’s also essential to manage the psychological aspects. It’s strange for a figure who is extremely number oriented. However, the data can’t be denied because they’re there and generally the price reflects the knowledge of all the players involved in the market.
However, these aren’t absolute theories because every data is subject to interpretation. Your skill lies in making this study flexible, which requires great passion. Once this is done, your earnings and rewards will arrive accordingly.