What is Technical Analysis?

  1. A method of evaluating the movement of financial instruments through studying past market data, such as charts of price and volume, as a basis for forecasting future price behavior.
  2. An approach to forecasting commodity prices that examines the patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors.
  3. An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.
  4. Technical analysis is the examination of past price movements in order to predict future price movements. Technical tools, indicators, and charts are thoroughly reviewed during this process. Technical analysis considers the support and resistance lines, trend lines, chart formations, and other technical indicators such as MACD, RSI, and Money Flow.

The underlying principles of technical analysis

Price includes everything. Specialists in technical analysis assume that the current market price fully reflects and includes all effective information.

That is, the information is already reflected in the price, and such price is fair.

Therefore, it can serve as a basis for analysis.

In a more extended interpretation, we can say that the market price reflects the knowledge of all market participants, including traders, investors, portfolio managers, analysts on the part of buyers and sellers, strategists, technical analysts, fundamental analysts and many others.

In many ways this is true, but by itself, the technical analysis has its undeniable advantages and disadvantages.

Market Price is not chaotic

Price movement is not chaotic.

Modern markets are complex and unpredictable, but in any combinations, there are times when the price of an asset moves directionally.

And there are even more prolonged and protracted periods when the price of the same asset does not move directionally.

That is, prices still do not move chaotically, otherwise the entire technical analysis would be meaningless, and would not work. And the most basic and effective task for any trader is to detect these periods and the use such trends for earnings.

Technical Analysis is a direct tool to forecast

The principle of “WHAT” is more important than “WHY”.

The price is the end result of the battle between the forces of supply and demand, between “bulls” and “bears” in the market.

The purpose of technical analysis is to forecast periods, the transition between them and the direction of the price movement.

Therefore, technical analysis is a “direct” tool because it focuses solely on price.

Without specifying a string of questions “Why? How ?” unlike technical analysts, the same experts in fundamental analysis and analysts are always interested in what happened and why, and why the price is like this at the moment.

Thus, technical analysts are only guided by “what” rather than “why.” Why has the price increased? The answer is simple: the demand increased.

After all, the price of the instrument is nothing else but the amount you’re ready to pay to acquire it.

And to know “why” you want to do it is not at all necessary.



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