Technical analysis is the study of the price movement of a particular Forex currency pair or CFD asset in order to find some indication of future price direction. Essentially, technical analysis attempts to forecast future price movements by examining past supply and demand changes as these are reflected in changes in the price of an asset over time.
Basic Principles of Technical Analysis
The Market Discounts Everything
Technical analysts assume that, at any given time, a stock’s price reflects everything that has or could affect a certain currency pair or CFD asset – which includes the fundamental factors. Technical analysts believe for example that a company’s fundamentals, along with broader economic factors and market psychology, are all priced in. This therefore makes only the analysis of price movement necessary.
Price Moves in trends
In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.
History tends to repeat itself
Another important idea in technical analysis is that history repeats itself in regular, fairly predictable patterns. These patterns, generated by price movements, are called signals. A technical analyst’s goal is to uncover a current market’s signals and place his positions accordingly.
It’s All In The Charts
The most fundamental principle of technical analysis is that the price reflects all relevant information. Thus, fundamental data about the security does not need to be included into the analysis. The underlying logic here is that most price movement is driven by human beings, therefore all market variables are reflected in price movement, and since humans are creatures of habit, certain patterns tend to repeat themselves in the market.
Technical analysis traders rely on price charts, volume charts and other mathematical representations of market data, also known as indicators, to try and predict the ideal entry and exit points for their positions. Some indicators can help traders identify a trend, while others help determine the strength and sustainability of a trend over time. The most popular chart types include:
– Candlestick charts
Instead of a simple bar, each candlestick reveals the high, low, opening and closing price for the period of time it represents. Candlestick patterns are the most popular chart types as they provide more information and details to traders.
– Bar charts
The most common type of chart showing price action. Each bar represents a period of time – a “period” as short as 1 minute or as long as a month. Overtime, bar charts can reveal distinct price patterns.
– Line charts
A line chart is the simplest kind of chart. It represents a curve, which shows closing price for a certain period of time. Line charts can be also based on the median price, opening price, lows or highs.
Traders use charts, to search for price patterns which are essentially market formations or market “moods”. The trick is to recognise what the current mood of the market is and more importantly, how long it is going to last. To help identify these major patterns, BDSwiss provides traders with a series of charting tools. These can vary from simple support and resistance lines to a multitude of technical indicators which are applied directly to their charts in real time.
Using Technical Indicators
Usually, in technical analysis price charts are studied with the help of various tools such as indicators. Technical indicators are statistically programmed add-ons to the body of trading platforms that process and display information about the price movement or estimated future price movement in an attempt to assist with price prediction.
Types of Technical Indicators
Indicators can be divided into three different categories with common characteristics. These are Price, Volume and Oscillator indicators Pricing indicators help you gauge overall price movement trends, volume indicators help gauge market sentiment while oscillator indicators can help you determine the degree by which overall trends are changing.
Lying at the foundation of technical analysis are literally hundreds of technical indicators that can be used as part of an underlying investment strategy. This makes technical analysis a large and diverse field, while traders will experiment with different indicators and end up favouring a specific trading strategy, but is important to remember that no indicator has ever been found to be completely conclusive.