What is Technical Analysis?
Technical analysis is simple economics – a tool that deals with the supply and demand of the market. If the prices of a stock are rising, investors presume the market is undervalued and they buy and sell if the market is overvalued. However, basing the projections of the market on intrinsic value alone cannot correctly show the future path of that market.
One fundamental technique that can validate the authentication of a market, stock, or financial security as a good investment is by using technical analysis. Unlike fundamental analysis, technical analysis measures the viability of a potential investment and the chances of profiting from it.
What is Technical Analysis?
Technical analysis uses price, trends, movement, and volume in predicting the financial markets. This analytical tool is used on any security, including stocks, commodities, fixed-income, Forex, cryptocurrency, futures, and many more.
If the security has previous trading history, analyzing it can be adequately employed to make accurate predictions of its current movement. However, keep in mind that the concept of technical analysis is efficient for short-term trading but not long-term.
Underlying Technical Analysis Assumptions
Any financial market relies on two methods of analysis – fundamental and technical analysis. While fundamental analysis uses the financial records to evaluate the value of securities, technical analysis does otherwise. It uses statistical data publicly available to determine its current movement. Technical analysis attempts to understand the behavior of the market through trends and patterns and how it affected security.
Based on this understanding, Charles Dow, the pioneer of modern-day technical analysis, had two basic assumptions:
1.Trends and patterns can be easily identified even in a random market price because they will often repeat themselves.
2.The market has factors that can influence the price of a security.
Based on the above assumptions, modern-day analysts have drafted three assumptions to better understand the concept of technical analysis.
History Will Always Repeat Itself
Well, not for everything in life but for the financial market, what goes around comes around. Based on this assumption, technical analysts believe the market moves in a way that will return at some point. This takes it consideration human emotions and the market reaction. This enables traders to look at price charts and changes for predicting the future price movement based on the market reaction due to human psychology.
Prices Are Driven By Trends
This assumption believes the prices of securities on the market are not random but follow a pattern which most likely has happened before. Using price movement, analysts can determine the short-term and long-term trends of the market.
Price Discounts Everything
This assumption states that when the price is considered as the analytical measure of a financial market, other factors are inconsequential. Apparently, price dictates the economy, trends, and takes into consideration the entire market.
Bitcoin Technical Analysis
For traders and anyone interested in trading cryptocurrency, learning how to read the charts is an essential skill to a successful trade. Reading any trading chart is usually challenging for newbie as the lines, shapes, and colors look like hieroglyphs. However, this is not a problem when you begin to understand the technical jargon associated with trading cryptocurrency.
Luckily, the crypto market is similar to regular stock and securities and functions in the same patterns.
So technical analysis allows traders to recognize the trends, movements, and patterns to make profitable decisions for the future.
Common Indicators Used In Technical Analysis
Trends are directional movements that determine the way the market is going. There are three identifiable trends in trading, namely:
1.The uptrend – the price of the currency is gaining momentum with higher highs and higher lows.
2.Downtrend – the price currency is failing, losing traction and value with lower highs and lower lows.
3.Sideways trend - the price is neither rising nor falling. It is balanced and may not yield at this level.
To properly understand this in trading, the terms bullish and bearish are used. When the market is bullish, it depicts the action of going high like the strike of a bull. In this position, the price is increasing, and traders make more profits.
In the bearish stance, the price is coming down, taking the same pattern as a bear striking its prey down. In this position, the market is dropping, and traders that do not anticipate the drop might lose more of their investment.
Price is the best tool used in technical analysis to accurately predict the market. By examining the price charts, analysts can determine the performance of the market of particular securities.
Chart Pattern Analysis
There are different chart patterns available to read the market, including line, candlestick, bar, and others. Candlestick is the most commonly used in crypto trading. These candlesticks provide you with all the necessary information, including price movement, highs, and lows, market value, opening, and closing within a stipulated time frame.
The volume shows the trader the number of shares traded over a period during the day trade. Analyzing the volumes will determine the strength of the currency. An uptrend indicates high volume trading, and a low trend shows a scanty market.
If you are using the candlestick chart to determine the volume, a high or green line is high trading volume, and red is the opposite.
Relative Strength Index
This measures the momentum of currency in the current market. Analysts use this technical tool to accurately measure and compare the price movement with a previous trade to determine if the price will go up or down. The RSI is a value between 0 and 100 and examined daily.
Support and Resistance
In addition to the plethora of factors that determine a market, there are invisible barriers traders should be aware of when pursuing a price. Support and resistance are indicators that clearly identify if a stock or currency is bullish or bearish.
Support means there is a high demand for securities indicating a higher price. While the resistance is the point where sellers dump their stock to prevent the price from rising on the market.
There will always be factors that determine the direction of the market; hence traders should try to use the right technical tools to study and make appropriate predictions. Remember, regardless of these elements, there is always a slight chance of manageable failure.
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