Technical analysis for beginners
In this section of our educational materials, you will find the most useful and comprehensible information about the TA tools. You will learn technical analysis and find out more about trends and indicators. Understanding the logic and instruments of TA is a key to successful trading.
Technical analysis (TA) is a method of predicting the future performance of an asset’s price (in our case, the price of a currency pair) on the basis of its historical performance.
In other words, technical analysts study financial charts in order to determine what will happen with the price next.
In contrast to fundamental analysis which is regarding the “value” of the asset, technical analysis is only interested in price, volume, and other market information. Some traders use either technical or fundamental analysis, while others combine these two methods to make trading decisions.
TA is based on the Dow theory, which is an approach to chart analysis proposed by Charles Dow (1851–1902), co-founder of Dow Jones and Company and the first editor of The Wall Street Journal. The other great contribution to technical analysis comes from Japan, where a specific type of chart was used for tracking the price of rice since the 1600s.
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There are three main assumptions of the technical analysis:
- The market discounts everything. Technical analysts think that the price of a financial asset already reflects all the relevant information about it including the various economic factors and market psychology. As a result, to make predictions about the future price it’s only needed to analyze the chart and nothing more.
- Price moves in trends. According to technical analysts, the dynamics of a market has a certain rhythm, an order to it. The movement of prices has a bias (upward, downward, or sometimes horizontal) that is called a trend. It’s necessary to analyze the market specifically looking for trends. If there’s a trend, the price will more likely continue moving in line with it rather than change direction. This assumption forms the basis for many trading strategies.
- History tends to repeat itself. It is believed that the past movements of the price get reproduced in the present and the future. It happens because traders tend to react to specific things they see on the charts in the same way for psychological and emotional reasons. It’s possible to identify specific patterns and expect that these patterns will occur in the future causing the same price action that they used to provoke in the past. The conclusion is that it’s necessary to study the chart history in order to be able to read the signs of the upcoming price moves.
Technical analysis involves the study of price action as well as the use of technical tools and indicators. The term “price action” refers to movements the price makes. Price action trading means that you take hints on whether to buy or sell based only on the price you see on a chart. Such a method suggests that you are not using technical indicators or give them very little weight in your decision-making. If you feel more confident when you trade with indicators – go for it! There are many tools that will help you in trading.
- Firstly, consider placing trendlines and support/resistance levels on your charts. Trendlines will help you to see the main direction of the asset’s price. Support and resistance levels will identify the “magnets” for the price, where it is more likely to reverse or consolidate.
- Secondly, there are indicators. In MetaTrader, indicators are divided into four main groups: trend, oscillators, volumes, and Bill Williams’ oscillators.
Technical analysis of the financial market
The knowledge of technical analysis is crucial if you want to be a pro trader in the forex market. Forex technical analysis requires understanding of trends, levels, chart and candlestick patterns, and oscillators. The fans of technical analysis believe that even when you are stuck with fundamental analysis and confused with all the news coming out throughout a day, technical analysis forex will always help you, as the price discounts everything.
Technical analysis of the stock market
If you trade stocks, the advanced techniques of technical analysis will help you here as well. Due to the limited trading time, stock prices often form gaps in the charts. Technical analysis of stocks teaches how to deal with them and get successful results. Another important thing is a technical analysis of stock trends. It identifies the main trend of a stock and keeps you on track even when a sudden correction occurs.
Introduction to technical analysis