Technical Analysis is a method of estimating price movements by looking at historical data on the market. Price data is the type of data that is most widely used in the analysis process, although there are several other types of data that are also used in the analysis process such as volume and open interest in futures contracts.
What is Technical Analysis
In essence, when using any method of technical analysis is to return to the basic theory, which methodologically has proven effective for a certain period of time. After finding a suitable trading system, then you can find other techniques that can be combined with existing trading methods.
Almost all traders use technical analysis even though the amount is minimum. Even those who strongly refer to fundamental analysis will use or see the price chart before making a transaction.
At the very basic level of theory, charts help traders determine the ideal level to enter the market before making a transaction. Charts provide visual effects from historical data on price movements. Therefore, traders can look at the chart and find out whether they are buying at a reasonable price (based on historical price data in a particular market), have followed the trend, or may make transactions when the forex market moves sideways. In practice, a technicalist might override market fundamentals by busy looking at graphs and data tables.
Assume Technical Analysis:
Market fundamentals have been reflected in current market prices. So market fundamentals and other factors, such as differences of opinion, hope, fear, and market participants’ sentiments, need not be studied further.
History repeats itself and therefore the market moves in a predictable, or at least certain pattern. These patterns result from price movements, also called signals. The purpose of technical analysis is to get signals given by current market conditions by studying past signals.
Prices move in the form of trends. Technical analysts usually do not believe that price fluctuations move in unpredictable and random conditions. Prices can move in one of three directions, namely up, down, or sideways. When a trend is formed from existing market directions, it will usually continue for several periods.
Technical Analysis Component
Systems from technical analysis usually include price charts, volume charts, and several other mathematical methods of market patterns and behavior. Mathematical manipulation methods of various types of market data are used to determine the strength and resilience of certain trends. So technical analysts tend to use a variety of ways before making transactions rather than just relying on price charts to estimate future market values.
Bar Chart Forms: There are many types of charts that show price movements, the most commonly used are bar charts. Each bar (bar) indicates price movements in a given period, one minute, one day, or one month. Price movements in the form of rods will make certain patterns in a period.
Candlestick forms: Like bar charts, candlestick patterns can be used to predict markets. Because the shape has color, candlesticks have more interesting visual effects and are easily analyzed than bar graphs.
Points & figure forms: Patterns in this form are actually the same as the patterns produced by bar charts, but points & figures do not use time scales to indicate certain days related to certain price movements.
Trend Indicator is an indicator that can describe the price movement in one strong direction for the foreseeable future. The trend moves in 3 directions: up, down, and sideways. Trend indicators smooth the varying price data to create a composition of market direction. (example: Moving Average).
Market Strength Indicators: This indicator describes the intensity of market opinion related to a price by looking at the market position taken by various market participants. Volume or open interest is the basic ingredient for this indicator. Signals given are coincident or leading. (example: Volume).
Volatility Indicators: Volatility indicators are general terms used to describe the strength of a movement or measure of price fluctuations. Generally, changes in volatility tend to affect price changes. (example: Bollinger Band).
Cycle Indicator: Used to indicate a repetitive pattern of market movements, specifically for recurring events such as seasons, general elections and others. Many markets tend to move in a cycle pattern. Indicative
Support/Resistance Indicator: Support/Resistance describes the price level of repeated increases and decreases in certain upper and lower ranges. (example: pivot point).
Momentum Indicator: This indicator describes the speed of price movements in a certain period, also determines the strength or weakness of a trend. If there is extreme price movement with weak momentum, it is a signal from the end of the movement in that direction. (example: RSI, Stochastic, MACD).
Importance of Discipline
As with other aspects of trading, the use of technical analysis must be disciplined. Often a trader fails to make a transaction, buy or sell, when the price has reached a technical pattern that is identified as a signal to enter or exit the market.
A common mistake often made by traders is to expect prices to reverse direction to a losing position and liquidate too quickly a position that is experiencing profits. Therefore, high discipline is needed in the use of technical analysis.