LESSON 15. Principles of technical analysis
Technical analysis relies solely on the price chart. It shows what is happening in the market now and what was happening there earlier.
The fundamental analysis explains why it happens or, in other words, which fundamental (economic) factors caused the price moves seen on the chart.
Let’s learn a bit more about these 2 types of analysis.
Technical analysis is based on three assumptions: The first one is that the market discounts everything. It means that all information – economic, political factors and others – is already reflected in the price, so there is no need to analyze anything, but the price chart.
The second one is that price moves in trends. Once you’ve identified a trend at the chart, the price will more likely continue going in the same direction as the trend rather than go against it.
The third assumption is that history repeats itself. The patterns seen on the price chart now were there earlier.
So, in order to make a forecast for future, you need to find a similar situation at the chart in the past and see, how it was resolved.
To put simpler, technical analysts study the past to predict the future.
The main reason such analysis works is in human psychology: market participants tend to show the same reaction to similar triggers, so price patterns often repeat themselves on the chart.
To sum up, understanding trends as well as learning to read chart and price patterns and use technical instruments and indicators can be of great benefit to you and increase your chance to make money.