Introduction To Technical Analysis

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What Is Technical Analysis?

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Technical analysis is said to be a trading method used to figure out trading opportunities by analyzing patterns put together from past trading activities, for example, price movement, and volume. Just as a meteorologist who can predict the possibility of rain through weather patterns so does a skilled analyst with the help of price or volume patterns.
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All thanks to Charles Dow for creating the Dow Theory. This paved way for reading the market and professionals have been following his strategy since then.

Understanding Fundamental Vs. Technical Analysis

There are two major methods used to analyze the market and make smart and safe decisions:

  • Fundamental analysis and
  • Technical analysis.

Technical Analysis vs. Fundamental Analysis
Both methods are used for research purposes for identifying if a market has potential or not.

Fundamental analysis involves analyzing a company’s records to attain the fair value of the business, while technical analysis assumes that a market's price already reflects all publicly available information and dwells majorly on the graphical price movements. Earnings, expenses, assets, and liabilities are all important characteristics to fundamental analysts. Technical analysis checks for patterns and trends from past graphs.
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Importance of Technical Analysis.

The major difference between the two forms of analysis is that in fundamental analysis, what we look out for results in sales and earnings but in technical, we put an eye out for prices volume movements through the help of supply and demand.

  • It is used to perform/instigate short-term trading signals. It is also used to access the strengths and weaknesses of the market. This information helps guide the next decision of analysts.

  • It deals with past trading data and can be used in stocks, futures, currencies, and also crypto.

Technical analysis works with the prediction that previous trading activities and price changes of a market can be valuable indicators of the market's future price movements when following the trading rules. Instead of using just one trading pattern, they implement several in just one chart to eliminate risk.

The major reason why the importance of TA is to try to predict the price movement of virtually any tradable market that is influenced by forces of supply and demand, including stocks, bonds, futures, and currency pairs. It can also be said that TA is the study of supply and demand and how it affects the market price movements.

Types of indicators:

  • Price trends
  • Chart patterns
  • Volume and momentum indicators
  • Oscillators
  • Moving averages
  • Support and resistance levels
  • Underlying Assumptions of Technical Analysis

Prices always move in trends, technical analysts expect those prices even in random market movements to exhibit trends regardless of the time frame. In other words, a stock price is more likely to continue a past trend than move sideways.

Facts about TA.
  • History tends to repeat itself.
  • The repetition process of price movements is often influenced by the market way of thinking, which tends to be very predictable due to emotions like fear or excitement.
  • Technical analysis uses chart patterns to analyze these emotions and subsequent market movements to understand trends.

Various forms of technical analysis have been in use for over 100 years, they are said to be still relevant because they show patterns in price movements that often repeat.

How the market really works.

Technical traders will place a stop-loss order below a moving average of a certain company. If a large number of traders have also done the same and the market reaches this price. There will be a large number of sell orders, which will push the market down, confirming the movement traders planned for.

When other traders will see the price decrease, they also sell their positions, the strength of the trend increases. This short-term selling pressure can be considered self-fulfilling, but it will have little bearing on where the asset's price will be weeks or months from now. In sum, if enough people use the same signals, they could cause the movement foretold by the signal, but over the long run, this sole group of traders cannot drive price.

Assumptions In Technical Analysts.

Skilled technical analysts accept three assumptions when trading.

  • Similar to the efficient market hypothesis, the market discounts everything.
  • They expect that prices, even in random market movements, will exhibit trends regardless of the time frame being observed.
    -They believe that history tends to repeat itself. The repetitive nature of price movements is often attributed to market psychology, which tends to be very predictable based on emotions like fear or excitement.

Anyways guys that’s all for now.

Till next time
I still remain Trojan
Keep on buzzing 🐝🐝🐝

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