What is technical analysis?
Along with it are fundamental analysis and sentiment analysis. But there are many differences that I will explain in the article for you to understand.
This prediction of future price movements is based on predicting past prices. However, this is not an absolute prediction. It just helps you determine a relative way to have an effective trading strategy.
Two main components to technical analysis:
- Time frames are considered.
- Specific technical indicators that traders choose to use.
The basis of technical analysis
In order to predict future price movements, an investment strategy is required. Main "Dow Theory" laid the foundation for what is known as technical analysis. Therefore, quoting from Dow theory, there are prominent theories as follows:
- Prices reflect all market information.
- Prices change according to specific trends, not randomly.
Prices reflect all market information
Analysts believe that the current price will reflect all the information from broad market factors and market sentiment. Because it represents a fair value and forms the basis for analysis.
Price changes according to specific trends, not random
Whether it is on a short, medium or long term basis. Technical trading strategies are mainly based on the assumption that price is likely to repeat a past trend. Past prices signal future price action.
Technical traders believe that current or past price action in the market is the most reliable indicator of future price action.
Technical analysis is not only used by traders. Many fundamental traders use fundamental analysis to determine whether to buy into the market. But to make that decision, they use technical analysis to identify good and low-risk entry prices.
Chart analysis on time frames
Technical traders analyze price charts to try to predict price movements.
The popular timeframes that technical analysts check most often include: 5-minute, 15-minute, hourly, 4-hour, and daily chart.
The timeframe to study is usually determined by individual trading style:
- Traders open and close trading positions in a day. Prioritize price movement analysis on shorter timeframe charts. For example, a 5-minute or 15-minute chart, etc.
- Long-term traders who hold market positions for long periods of time tend to analyze the markets using hourly, 4-hourly, daily or even weekly charts.
When you are looking for an opportunity to profit from price movements that occur during a trading day. The price movement in the 5-minute, 15-minute time frame has a big influence for this.
However, the same price movement viewed on the daily chart may not be particularly important to you. Or simply, it is indicated for long-term trading purposes.
Example of using timeframe
At the chart of XAG/USD (silver) on the daily time frame. Its price traded in a range of about 16.53 to 19.65 going on for many months. An investor who wants to buy silver will drop it to the 16.53 zone to buy.
That same trading range is considered on the hourly timeframe. The results show a steady downtrend. Short-term day traders will shy away from buying silver when price action shows like that on the hourly chart.
Technical indicators are signals, or patterns generated by price, volume used by technical analysts or traders, etc.
By analyzing past price data, technical analysts use indicators to predict future price movements. Those metrics include:
- The trend indicator deals with lagging, measuring the strength and direction of the trend. The trend is considered bullish when the price moves above the moving average. When the price moves below the moving average, it is considered a downtrend. Detail moving average (MA), moving average divergence (MACD).
- Early indicator, which helps to determine the speed and volume of price movements by comparing prices over time. This category is about indicator Stochastic, relative strength indicator (RSI).
- The indicator measures the rate of price movement based on historical highest and lowest prices. That is Bollinger band and standard deviation indicator.
How is technical analysis used?
By using different charting and calculation patterns, it is possible to detect market trends and predict future movements.
Technical analysis is most commonly applied to price changes. But some analysts use it to track trading volume and other market measurements.
Historical prices and market sentiment are huge indicators of whether prices will soon rise or fall. This is also our belief in technical analysis.
If technical analysis is to be applied, it is important to choose the most suitable trading strategy or system. So you always have to find the correct and appropriate approach.
Advantages and disadvantages of technical analysis
Can identify signals for price trends in a market. Traders need to develop a method to determine the best market entry points. The use of technical analysis tools is a common way to do so.
Relying on tools, traders have created self-completed trading rules. As more and more traders use the same indicators to find levels support and resistance, there will be many buyers and sellers gathered at one price point. Then the pattern will certainly be repeated.
Market behavior is unpredictable. There is no guarantee that every form of technical analysis will be absolutely accurate. Although historical price patterns have given us insight into price movements.
It is advisable to combine indicators and analytical tools for the highest level of assurance. A risk management strategy is also required to protect against adverse price movements.
I still want to repeat: “No one indicator or technical analysis method is 100% accurate”. However, if you know how to use the combination properly, it will definitely help improve profits. So try to practice to form yourself an effective trading style. Thanks!