1. The market discounts everything. Technical analysts believe in the hypothesis of efficient markets. It means that all available market information is already priced in the asset’s market quote. As soon as new information meaningful to the asset’s price shows up, it is quickly digested by the market and causes price changes.
2. Prices move in trends. This principle is based on the assumption that assets’ prices are likely to move in trends until a technical indicator signals a reversal in the trajectory. A multitude of technical indicators is at investors’ disposal. Everyone chooses convenient indicators. The bottom line is to recognize a trend and open appropriate positions until indicators detect the signs of a trend reversal.
3. History repeats itself. This principle rests on market psychology to interpret repetitive price moves. Market psychology is the overall sentiment of all investors. It is believed that market sentiment makes the asset’s price increase or decrease. When investors are bullish about a particular security, they buy it and hence, push its price up. When their optimism wanes, they tend to sell it, so its price goes down.
Analyzing technical charts, we can identify trends and forecast a further price move of a particular asset or the market as a whole. Traders have an arsenal of methods and tools of technical analysis.
From a plethora of technical indicators, traders may pick anything to suit their needs. Here are the most popular of them.
1. A moving average is a lagging indicator. It is a way to smooth out price fluctuations by plotting the line through the average closing price of an asset. This way, a trader discovers an ongoing trend. The most popular periods of moving averages are 10, 20, 50, 100, and 200.
A moving average can be a simple one (SMA), exponential moving average (EMA), and Weighted Moving Average (WMA).
2. Moving average convergence divergence (MACD) is another trend-following indicator. It enables a trader to judge whether the current trend is still going on or it is about to reverse its direction.
It consists of two lines: the MACD line itself and the signal line. When the MACD crosses below the signal line, a trader receives a signal to buy a security. Alternatively, when it crosses above its signal line, this is a sell signal.
3. The relative strength index (RSI) is an oscillator that measures the strength of momentum according to a scale from 0 to 100.
The index indicates temporarily overbought or oversold conditions in a market. An RSI value over 70 reflects overbought conditions whereas an RSI reading below 30 is considered oversold.
A period by default is 14, but traders are free to adjust it to their strategies.
4. A stochastic oscillator is a momentum indicator comparing the asset’s closing prices in percent to a range of its prices over a certain period. It fluctuates in a range of values from 1 to 100. The zone above 70 indicates that the asset is overbought, but the zone below 30 signals oversold market conditions.
5. Bollinger Bands are the indicator to measure volatility. The indicator consists of three lines. The upper and the lower bands visualize a standard deviation of +2 and -2, whereas the middle line represents a 20-period simple moving average.
When an asset trades with growing volatility, the bands get wider. When the volatility of an asset calms down, the bands get narrower.
Apart from technical indicators, oscillators, and moving averages, there are technical patterns and Japanese candlesticks such as the head and shoulders, pennant patterns, the golden cross, the hammer, Doji candlesticks, and a lot of others that you are certainly aware of. Instruments of technical analysis are broadly divided into trend-following indicators and trend-reversal indicators.
Conclusion
Technical analysis has been in existence for over a century. This analytical discipline has avid fans among traders. You also can take up this practice right now. Analyzing charts, you should try to discover regular patterns of price moves and identify trends. However, it will take time to master this skill due to a plethora of methods and indicators.
Technical analysis is not a crystal ball. It is rather a helpful instrument to determine risks and understand the market psychology. Though one of the principles says that an asset’s price contains all relevant information, force majeure circumstances make an exception, for example, wars, pandemics, disasters, etc).
Commonly, fundamental analysis better suits long-term investment. Technical analysis could be more useful for the short term. All in all, the combination of both methods could produce the most accurate prognosis.
2. Prices move in trends. This principle is based on the assumption that assets’ prices are likely to move in trends until a technical indicator signals a reversal in the trajectory. A multitude of technical indicators is at investors’ disposal. Everyone chooses convenient indicators. The bottom line is to recognize a trend and open appropriate positions until indicators detect the signs of a trend reversal.
3. History repeats itself. This principle rests on market psychology to interpret repetitive price moves. Market psychology is the overall sentiment of all investors. It is believed that market sentiment makes the asset’s price increase or decrease. When investors are bullish about a particular security, they buy it and hence, push its price up. When their optimism wanes, they tend to sell it, so its price goes down.
Analyzing technical charts, we can identify trends and forecast a further price move of a particular asset or the market as a whole. Traders have an arsenal of methods and tools of technical analysis.
From a plethora of technical indicators, traders may pick anything to suit their needs. Here are the most popular of them.
1. A moving average is a lagging indicator. It is a way to smooth out price fluctuations by plotting the line through the average closing price of an asset. This way, a trader discovers an ongoing trend. The most popular periods of moving averages are 10, 20, 50, 100, and 200.
A moving average can be a simple one (SMA), exponential moving average (EMA), and Weighted Moving Average (WMA).
2. Moving average convergence divergence (MACD) is another trend-following indicator. It enables a trader to judge whether the current trend is still going on or it is about to reverse its direction.
It consists of two lines: the MACD line itself and the signal line. When the MACD crosses below the signal line, a trader receives a signal to buy a security. Alternatively, when it crosses above its signal line, this is a sell signal.
3. The relative strength index (RSI) is an oscillator that measures the strength of momentum according to a scale from 0 to 100.
The index indicates temporarily overbought or oversold conditions in a market. An RSI value over 70 reflects overbought conditions whereas an RSI reading below 30 is considered oversold.
A period by default is 14, but traders are free to adjust it to their strategies.
4. A stochastic oscillator is a momentum indicator comparing the asset’s closing prices in percent to a range of its prices over a certain period. It fluctuates in a range of values from 1 to 100. The zone above 70 indicates that the asset is overbought, but the zone below 30 signals oversold market conditions.
5. Bollinger Bands are the indicator to measure volatility. The indicator consists of three lines. The upper and the lower bands visualize a standard deviation of +2 and -2, whereas the middle line represents a 20-period simple moving average.
When an asset trades with growing volatility, the bands get wider. When the volatility of an asset calms down, the bands get narrower.
Apart from technical indicators, oscillators, and moving averages, there are technical patterns and Japanese candlesticks such as the head and shoulders, pennant patterns, the golden cross, the hammer, Doji candlesticks, and a lot of others that you are certainly aware of. Instruments of technical analysis are broadly divided into trend-following indicators and trend-reversal indicators.
Conclusion
Technical analysis has been in existence for over a century. This analytical discipline has avid fans among traders. You also can take up this practice right now. Analyzing charts, you should try to discover regular patterns of price moves and identify trends. However, it will take time to master this skill due to a plethora of methods and indicators.
Technical analysis is not a crystal ball. It is rather a helpful instrument to determine risks and understand the market psychology. Though one of the principles says that an asset’s price contains all relevant information, force majeure circumstances make an exception, for example, wars, pandemics, disasters, etc).
Commonly, fundamental analysis better suits long-term investment. Technical analysis could be more useful for the short term. All in all, the combination of both methods could produce the most accurate prognosis.
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