The technical analysis addresses the study of financial markets in order to be able to predict its behavior in the future. Despite having limitations, this form of study based on the chartism It is probably the most widespread today due to the pseudo-democratization of its graphical tools and the improvement of access to information in real time.
Technical analysis is an area of research that uses historical market data to predict the future direction of quotes. This approach achieves this by analyzing market data such as prices, volumes, and open interest.
This means that technical analysts make trading recommendations based on trading data and mathematical indicators. The output of these calculations is automatically represented in a real-time graph, which traders will evaluate to choose whether to purchase or sell.
Technical analysis allows you to predict the direction of the quotes, making it one of the most significant instruments for anticipating financial market behavior. This is especially true when technical and fundamental analysis are combined. The combination of both types of analysis provides traders with a more complete picture of market reality. As a result, traders can gain a distinct advantage when conducting benefit trades.
PRINCIPLES OF TECHNICAL ANALYSIS
Technical analysis has a series of pillars that support its validity. When Charles Dow developed his theory, he summarized those principles into the following:
- The price discounts everything. This is the most important principle of technical analysis. This principle indicates that; all information is included in the price. That is, political factors, wars, reports of benefits of a company, social situation of a country. Everything is discounted in the price. This means that all that local or global action that may have an impact on a certain value will be reflected in its price.
- Markets are trending. This is a situation that occurs at all times and without exceptions. Trends can be upward, downward or lateral. Charles Dow explained that, an asset is trending until you prove otherwise. This means that; until the reference maximum or minimum is not exceeded, the trend of that value continues.
- Human behavior is repetitive. Human psychology is predictable because its mass behavior is cyclical and responds in the same way to similar events throughout history. Under this precept, the technical analysis affirms that; patterns in prices are unconsciously created that reflect this behavior. Thanks to that, their study allows us to predict future price movements since they are affected by the psychology of the group related to it.
TECHNICAL ANALYSIS TOOLS
This is the most common chart format for visualizing and analyzing price movements over time in securities, derivatives, currencies, stocks, bonds, raw commodities, and other financial instruments. Because they originated in Japan, they are also known as Japanese candle charts. Candlestick charts use candle-like symbols to indicate multiple pieces of price information such as the open price, closing price, lowest and highest price.
These represent compressed trading activity for a single period of time (one minute, hour, day, month, etc.). Each candlestick symbol is represented along a time scale on the axis x, to show commercial activity over time, while the axis y it is used to represent the price. They are especially useful thanks to their versatility and their utility to detect and predict market trends over time.
The charts are one graphic representation used to organize the information contained within a market. In general, the financial and cryptocurrency markets use bar charts or line charts, to represent the live flow of a security within a market. The purpose of using these graphic tools is to condense as much information as possible into a single box, allowing for a better grasp of the material. Charts are frequently used to help people understand enormous volumes of data and the links between them.
This is particularly important in a financial market where information on the worth of stocks changes often and data is constantly flowing.
Technical indicators are statistical-based tools to determine future market behavior. These are the four general categories of indicators:
- Trend– These indicators are used to detect trends in the financial markets. This group of indicators is inefficient for periods of equilibrium (Flat) in the market. Trend indicators indicate the direction of price movement.
- Momentum: This is an oscillator-type indicator that shows the trend of the prices of an asset and the changes it has had in a certain time. Its function is to anticipate trend changes and teach the speed of change in prices. The exercise consists of observing the difference in prices between the closing of the current period and that of days before.
- Volatility: These indicators look at how market prices have changed over a period of time. The greater the volatility, the faster prices fluctuate, and the lower the volatility, the slower prices change. It can be monitored and estimated using historical data, as well as used to spot patterns. It can also indicate whether a market is overbought or oversold (meaning the price is unusually high or low) and can signal a trend reversal or stagnation.
- Volume: these are used to study the volume of a market, allowing the evolution of volume to be related to changes in the price.
TECHNICAL DRAWING SET
Another of the tools widely used in technical analysis are the technical drawing techniques. Technical drawing is a form of drawing that serves to bring a group of data to a graphical representation, in order to transform them into a descriptive graphic representation. With this, traders seek to facilitate the understanding and analysis of market charts.
These tools are widely used in technical chart analysis, where we can see it represented in graphs such as the linear graph, bar graph and the candle graph.
ADVANTAGES AND DISADVANTAGES OF TECHNICAL ANALYSIS
One of the core advantages of this tool is the Ability to identify signs of price trends in the market. This is a key factor in any operational strategy when conducting operations. Thanks to this, investors are able to develop a sound methodology, aimed at locating entry and exit points in the market.
Another of its advantages is that technical analysis tools they are very common and easy to use. In fact, they are so common that there are those who believe they have created self-respecting operating rules: The more investors use the same indicators to find the levels of support and resistance, there will be more buyers and sellers interested in the same price points, and patterns will inevitably repeat.
One of the main disadvantages of this tool is that There will always be an element of market behavior that is unpredictable.
It is because of that there is no guarantee that an analysis type is 100% correct. Although historical price patterns can give us an idea of the possible trajectory of an asset’s price, this is not a guarantee that it will happen.
Investors should employ various indicators and technical analysis tools to achieve the highest possible level of security and have a risk management strategy in place to protect themselves at unfavorable times.
IMPORTANCE OF TECHNICAL ANALYSIS
Technical analysis is a tool that offers the advantage of being able to be used on any financial instrument at any time. This allows it to be applied in any area of the financial market. It is precisely this versatility that makes it a powerful tool.
The only thing necessary to use it is to adapt to its own characteristics and the specific behavior of each market. In addition to this, technical analysis can be used on any graph, regardless of the time to be measured. In other words, it can be analyzed in the short, medium or long term. These characteristics make technical analysis easily adaptable to the needs of financial analysts and traders.
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