What is technical analysis?
Along with it are basic and sentimental analysis. But there are many differences that I will explain in the article for you to understand.
Predicting future price movements is based on past price projections. However this is not an absolute prediction. It only helps you identify a relative way to have an effective trading strategy.
Two main components for technical analysis:
- The time frames are considered.
- Specific technical indicators that a trader chooses to use.
Fundamentals of technical analysis
To predict future price movements, investment strategies are required. Main "Dow Theory" laying the groundwork for what is called technical analysis. Therefore, from the Dow, there are outstanding theories as follows:
- Prices reflect all market information.
- Prices vary according to a specific trend, not coincidentally.
Prices reflect all market information
Analysts believe that the current price will reflect all information from broad market factors and market sentiment. Because it represents a fair value and forms the basis for analysis.
Prices vary according to a specific trend, not coincidentally
Whether it is on a short-term, medium-term or long-term basis. The technical trading strategy is mainly based on the assumption that prices will probably repeat a trend in the past. 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 just used by traders. Many fundamental traders use fundamental analysis to determine whether to buy in the market or not. But to make that decision, they use technical analysis to identify good buy and low risk.
Analyze the chart on time frames
Technical traders analyze price charts to try to predict price movements.
Common time frames that technical analysts regularly check out include: 5 minutes, 15 minutes, hours, 4 hours, and daily charts.
The time frame for research is usually determined by the style of individual transactions:
- Traders open and close a day's trading positions. Prioritize price movement analysis on shorter timeframe charts. Such as 5 minute or 15 minute charts, ...
- Long-term traders who hold a market position for a long time tend to analyze the market with hourly, 4-hour, daily or even weekly charts.
When you are looking for an opportunity to profit from the price fluctuations that occur in a trading day. Price fluctuations within a 5 minute, 15 minute time frame have a major impact on this.
However, the same price movement seen on the daily chart may not be particularly important to you. Or simply, it is indicated for long-term trading purposes.
Examples of using time frames
On the chart of XAG / USD (silver) on the daily time frame. Its price traded in the range of 16.53 to 19.65 for several months. An investor who wants to buy silver will move it to the zone of 16.53 to buy.
The same scope of transactions is considered on the hourly time frame. The results show a stable downtrend. The short-term traders of the day will be afraid to buy silver when price action shows that on the hourly chart.
Technical indicators are signals, or patterns created by price, volume, used by technical analysts or traders, etc.
By analyzing historical price data, technical analysts use indicators to predict future price movements. Those indicators include:
- Trend indicators relate to latency, measure strength, and trend direction. The trend is considered bullish when the price moves above the average. When prices move below the average, it is considered a downtrend. Detail moving averages (MA), Moving average converging divergences (MACD).
- Early indicators help determine the speed and volume of price movements by comparing prices over time. This kind of talk about indicator Stochastic, relative strength indicator (RSI).
- The index measures price volatility based on the highest and lowest historical prices. That is Bollinger band and the standard deviation indicator.
How is technical analysis used?
By using different chart patterns and calculations, it is possible to detect market trends and predict future fluctuations.
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 rise or fall soon. This is also our trust with technical analysis.
If technical analysis is applied, it is important to choose the most appropriate trading strategy or system. So you always have to find the correct and appropriate approach.
Advantages and disadvantages of technical analysis
It is possible to identify signals for price trends in a market. Traders need to develop a method to determine the best entry and exit points. The use of technical analysis tools is a common way to do so.
Based on the tools, traders have created self-improvement trading rules. As more and more traders use the same indicators to find out the level support and resistance, there will be multiple buyers and sellers gathered at one price point. Then the model will surely be repeated.
Unpredictable market behavior. There is no guarantee that any 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 analysis tools to get the highest level of assurance. Risk management strategies are also needed to protect against adverse price movements.
I still want to repeat: "No index or technical analysis method is 100% accurate". However, if you know how to use them in a reasonable way, it will definitely improve your profits. So try to practice to form yourself a very effective trading style. Thanks!