Technical analysis is the study of price movements regardless of the reasons behind them, in the hope that recent price movements will continue and therefore offer you a profit opportunity. In technical analysis, indicators in a chart are the central decision-making tool.
Some facts about technical analysis:
- What we now call technical analysis began with the observations of Charles Dow, founder of Dow Jones, before the end of the twentieth century.th century. Forex was the first asset class in which technical analysis was widely covered, beginning in the late 1970s, when computers and, above all, computers were available. Historically, technical analysis was first conceived and practiced in the equity market, but it was always a poor cousin compared to fundamental analysis after Graham and Dodd published a groundbreaking book. Value analysis, in 1934, which emphasized “valuing investment.” By 2000, most professional Forex traders used technical analysis, while less than half of equity analysts used it or admitted to doing so.
- Technical analysts don’t like the term “prediction” because what is actually being measured and estimated is a probable range of probable results, not a scientific prediction. Technical analysis is an empirical science in which the observation of probable results far exceeds the theoretical foundations. Some of the techniques underlie various competing theories, but no particular theoretical construction is required to use technical analysis techniques.
- Technical analysts believe that prices are not random and that they move most of the time in repetitive patterns that can be identified and exploited for trading profits. The reason patterns appear and reappear is the human behavior of the universe of operators of any type of security or asset class rather than any security-intrinsic feature.
- Technical analysts believe that everything that is important in the economic and financial environment, including data and news about one’s own security, is already reflected in the price, and therefore technical analysts may choose to monitor the environment or not, as he wishes. This is called a “discount.” The important point is that technical analysis is not antithetical to fundamental or economic analysis. Advanced technical analysts try to combine or combine both technical and fundamental analyzes in order to refine their predictions.
- All technical analysis techniques are based on past price movements, however recent, and therefore the predictive aspect is a skill that the analyst brings to the exercise. In any chart, there are numerous equally valid ways to place indicators. Technical traders with equal success can use the same indicators and arrive at different trading metrics (e.g., stop location). Give ten analysts a single indicator and a single security, and at the end of a trading contest, you will get ten results, and they could all be a net profit.
- Everything works. Each technique has its own virtues and drawbacks. All techniques can be applied cost-effectively. Give each of the ten technical traders one different technique with the same security and at the end of a commercial contest, each of them can be profitable.
The basic concept
The supply and demand of a security, and therefore its price, rises and falls for reasons that have to do with the sentiment of traders and the perception of the opportunity to win. The feeling and perception of the profit opportunity may arise from changes in conditions and news, but technical analysts are more interested in what the price does and are likely to do so in the near future than in the reasons for the movement. Sometimes this is expressed as “what” does the price instead of “why” it does.
The authors of the first major book of technical analysis, Edwards and McGee in the late 1940s, pointed out the basic pattern presented by all price series to a greater or lesser degree:
- A primary move up, followed by
- a flat or side trading period or by
- a secondary backward movement that follows some, but not all, of the original upward movement, followed by
- another ascending ascent that exceeds the previous maximum and restores the primary movement.
To scroll down, invert the image of the head.
One of the first popular trading systems based on the observation of Edwards and McGee was devised by someone from outside the financial industry, a Hungarian economist who emigrated to the US named Nicolas Darvas, who superimposed “boxes” on this pattern of passage. He wrote a best-selling book on the subject, As I did 2,000,000 on the Stock Exchange. One of the components of the Darvas box system was to buy when a stock reached a maximum of 52 weeks, standing at the previous low. The first trade is made at the maximum of 52 weeks and the subsequent operations are carried out at the break above the previous table. It is a simple breaking system that uses rectangles and is still used today.
The Darvas box may be overly simple or even raw, but it illustrates the point where prices move in bursts, followed by sideways or sideways backtracking, before another bursts in the original direction. Later analysts called these explosions “impulses” and “waves.” Whatever you choose to call a pattern, it is the basic conceptual observation of all technical analysis.
- If you’re a trend follower using long-term indicators like the moving average, you need to reconcile with setbacks that could threaten your profitability.
- If you are a breakout trader, you will have to accept that some breakouts will be fake and your stop will be successful.
- If you’re a momentum trader, you have to accept that sometimes stocks don’t show a directional momentum and range trading sideways, which makes momentum indicators misleading.
Tip: You may think it’s a good idea to read everything professional analysts have to say about a security, but beware: some analysts will be “talking about their position” (advocating a direction in which they already have a bet on attracting you in the same) trade) or talking with the hat. The wise technical analyst analyzes what the prices are doing on the chart and not what analysts are saying about prices. The chart is a tool for reducing comment clutter.
Sometimes we include links to online retail stores. If you click on one and make a purchase we may receive a small commission.