Technical analysis is one of the most demanded methods of forecasting the price movements on any market. The key assumption in the use of technical analysis is that the market has its own “memory”, and as such, there is a probability of patterns repeating themselves and of the market acting in a predictable manner.In this case, the forecast is formed based on the incremental changes in prices within a specific timeframe. In other words, technical analysis is the analysis of the changes in prices. By utilizing this methodology traders can assume, with a certain degree of accuracy, the future position of the market based on the existing trend, which can also be identified using this technique.
Fundamentals of technical analysis
People had tried to use everything but the kitchen sink to predict market behavior before technical analysis came about at end of the 19th century. For the most part, all stock and commodity price predictions were based on the fundamental data if it had not been treated like a gamble altogether. Price charts were only used intuitively.
The New York financial reporter Charles Dow laid out the fundamentals of the classic technical analysis. His work laid the foundation for the concept of price memory and most importantly brought about the possibility of predicting the future price of a security based on its past behavior. Down to the present day, these fundamentals stay true for the followers of technical analysis.
Methods of technical analysis
Technical analysis is rather an art than an exact science. Each trader may have their own approach to it. However, all such methods come down to calculating an indicator or finding a pattern in the price chart. More often than not, it is a combination of these two methods.
When it comes to indicators, they are all calculated from the previous price behavior. Mathematically, the price historical data could be plugged into a formula or a derivative from the trade volume could be taken. As a result, the obtained indicator helps fit certain lines or curves to the price chart.
Finding these patterns is an attempt to interpret the price history visually rather than having to look at a large set of numbers. In other words, if you see a pattern in the chart, there is a high probability of its repetition in the future.
Pros and cons of technical analysis
There are probably as many critics of technical analysis as there are fans. It is hard to argue with the skeptics: the history is in the past, and it does not always repeat itself. Yet technical analysis is used by the overwhelming majority of successful traders.
It is true that the market rarely exactly repeats its history. But what other than an analysis of price behavior could be used to understand the underlying processes? Technical analysis is not the holy grail of trading but rather one of the bricks used to build a successful strategy. Much work has to be done in order to find success in trading.
In this section, FXFINPRO Capital encourages you to review technical reports from professional analysts and compare them with your own vision of the market and methods of analysis.
Attention! Any information provided herein does not guarantee a positive trading result. Therefore, by using any of the contents in your trading activities, you take full responsibility for any result that may come from it. Please bear in mind, that forecasts are just that – forecasts, implying a possible significant error margin. Use the information provided at your own risk!