Technical Analysis: It is used to predict in which direction the markets will move in the future by looking at the historical price information on the graph of a financial asset.
In this article, I will explain what technical analysis is, how it works, and what tools it uses. Technical analysis is a method used to make decisions in financial markets. Technical analysts try to identify trading opportunities by examining how an asset's price has changed in the past and what this means in the future. Technical analysts believe that price movements follow certain patterns and trends and are likely to recur. Therefore, technical analysts try to gauge the direction and strength of the market using price charts and various indicators.
The basic principles of technical analysis are:
- Price reflects everything: Technical analysts assume that the price of an asset includes all the information that affects that asset. This information may include fundamental factors, market psychology, supply-demand relationship, and other elements. Therefore, technical analysts do not pay much attention to factors other than price.
- Price follows trends: Technical analysts agree that prices form trends in which they move up or down over a period of time. Trends can be short-term, medium-term or long-term. The most important rule of technical analysts is not to trade against the trend. That is, if prices are rising, you should buy, if they are falling, you should sell.
- History repeats itself: Technical analysts think that price movements repeat patterns observed in the past. The reason for these patterns is the psychology and behavior of market participants. People tend to react similarly in the same situations. For this reason, technical analysts try to recognize and take advantage of patterns that have occurred in the past and the outcome is obvious.
Some of the most important tools of technical analysis include:
- Price charts: Price charts are tools that visually represent the price changes of an asset. Price charts can be drawn in a variety of ways. The most common chart types are bar charts, candlestick charts, and line charts. Price charts can also be adjusted for different timeframes. For example, on the daily chart, each bar or candle represents one day, while on the hourly chart, each bar or candle represents an hour.
- Trendlines: Trendlines are simple tools used to determine the general direction that prices follow. Trend lines are drawn by connecting points where prices find support or meet resistance. Support refers to the level at which prices have fallen but cannot fall any further. Resistance refers to the level at which prices rise but cannot go higher. When trend lines are broken, it is interpreted that the trend has changed or weakened.
- Indicators: Indicators are mathematical formulas derived from price movements. Indicators serve to measure the direction, strength, momentum, volatility and other characteristics of the market. Indicators are usually displayed in a separate window above or below the price charts. The most popular indicators include moving averages, RSI, MACD, stochastic and Bollinger bands.
Technical analysis is a method used to be successful in financial markets. However, technical analysis alone is not enough. Technical analysts must adapt to market conditions, manage risk and implement trading strategies in a disciplined manner. It is important to remember that technical analysis has advantages and disadvantages.