What is Technical Analysis?
Technical analysis is a system that allows you to study and predict price movements in financial markets based on historical data and market statistics. It is built on the knowledge that if an investor can see past patterns, he can accurately predict future price movements.
Along with the fundamental analysis, it is one of the two leading schools of market analysis. While basic research focuses on the absolute value of the asset, taking into account external factors and the intrinsic value, the technical analysis relies solely on the price charts of an investment. Identifying patterns on a graph is the only way to predict future movements.
Examples of Technical Analysis Tools
Technical Analysts have a variety of tools at their disposal to identify trends and designs on charts. These consist of moving averages, support and resistance levels, or Bollinger Bands. All the devices have the same goal: to help investors who use technical analysis better understand the movement of the charts and detect trends more quickly.
Advantages and Disadvantages of Technical Analysis
Advantages of Technical Analysis
Spotting the price trend signals in the market is the crucial factor in any trading strategy. All investors need to develop a methodology to locate entry and exit points in the market. One of the most popular methods for them is to use technical analysis tools.
Technical analysis tools are so standard that some believe they have self-fulfilling trading rules: the more investors use the same indicators to find support and resistance levels, the more buyers and sellers will be interested in the same prices. And the patterns will inevitably repeat themselves.
Disadvantages of Technical Analysis
There will always be a component of market behavior that is unpredictable. There is no guarantee that any type of analysis is 100% correct, technical, or fundamental. While historical price patterns can give us an idea of an asset’s potential return, this does not guarantee that it will occur.
Investors should employ various indicators and technical analysis tools to achieve the highest level of security possible and have a risk management strategy to protect themselves during bad times.
Basic principles of technical analysis of financial markets
In general, the it consists of three principles:
1. Everything discount on the price.
It is the basic principle on which it rests since it assumes all the factors that can affect the market. Social, political, economic, speculative, or of any other kind (the elements taken into account in the fundamental analysis ) are already directly reflected in the price.
For this reason, if we analyze the price action of a given asset or market, we are indirectly analyzing all the factors involved in that market. Although this statement may seem exaggerated and pretentious to many. In reality, the only thing it says is that the price reflects all the changes between supply and demand, which is what moves prices.
That is to say, every time the demand exceeds the offer, the price logically rises, and on the contrary, when the request is more significant than the demand, the price begins to fall. It is a principle that applies to all markets. In this way, the technical analyst uses this knowledge and applies it, concluding that when the price of an asset rises, the demand for that asset has exceeded the offer. If the price falls, it is because the supply exceeds demand.
2. The price moves according to trends
Within technical analysis, the trend concept is one of the most important and should remain taken into account the most. The main objective of the technical study is to identify a trend. In its initial stage to open trades in the same direction of that trend and maximize profits.
3. History in the market tends to repeat itself
An essential part of technical analysis is put together on the study of emotions and human psychology. Therefore, this principle is equivalent to affirming that human beings generally tend. To behave in the same way under the same circumstances. Or very similar. For example, the technical formations that appear on the charts result from the bullish or bearish sentiment. The market has at a specific moment, which tends to behave in the same way under similar circumstances.