This section of ComeFareTradingOnline is dedicated to the fundamentals of technical analysis , that is the discipline of online trading aimed at analyzing the markets that is done through the study of charts. In this section we will talk about the basics, the technical indicators, the study of the charts with a small course also on how to analyze for example the eur / usd exchange which is what most interests traders.
Trading is first of all a technical discipline so it makes sense to start from the basics and historical data to try to predict future market movements that will help us in trading. The basics of At (technical analysis) can be applied to a whole range of assets or tradable assets ranging from currencies, to commodities to stock market indices.
Technical analysis: the definition
With the term technical analysis we have seen that we try to make predictions on the future prices of a market by analyzing past data, known as historical data. The prediction that can be made is always expressed in probabilistic and not absolute terms. In fact, the task of a trader is to understand which event can occur, which scenarios an event can trigger to influence the price of a market asset.
It is in fact possible to make estimates on both the euro / dollar exchange rate and the currency pairs and on the stock market indices. The level of analysis can obviously change over time. The data can be analyzed within a short time window such as minutes and we talk about intraday trading or on weekly or monthly analyzes.
Theoretical bases and foundations
If we want to find a historical location we must go back to the Dow Theory which in fact established the foundations for what then became the actual technical analysis.
The foundations of this theory are based on some fundamental concepts:
- Price movements are not entirely random but probabilistic theories can be developedT
- Theindices reflect everything in the sense that the elements of classic supply and demand are reflected on the stock market indices.
- How to do it is much more important than why
To clarify the first point, we must start with trends. Analysts often agree that in some periods prices do not follow a precise trend. If this were all random it would be difficult to trade profitably. It is therefore assumed that the markets have long periods of volatility and periods in which they have a non-random behavior. For this reason we can try to identify a trend both in the short term and in the long term.
For the second point, in general, it is believed that the current price of a market good fully reflects all the information that one has about that security. Information that is available to analysts, banks and investment funds. For this reason, the index reflects all this amount of information and can be interpreted to understand more about the future.
If you think about it then the vision of the technicians is based more on the how than on the why. For the technical analysis it is important to understand what the price and the historical trend are. The approach, in a certain sense, is very direct and is opposite to the fundamental analyzes which also try to understand why the price is just that. They put in external events like news to try to understand this, this is not what the chart analyst cares about. In the end, if you think about it, if anyone is willing to pay for a title, you don't understand why you should understand why.
Course: how to do technical analysis
Analyzing charts can be complex but also easy at the same time. In the next chart we see an example on stocks.
There are some aspects that we need to identify:
• Trend: it is necessary to identify what is the general trend of the stock. It is a type of analysis that is done with averages or trend lines.
• Supports: represent those price levels where a downside block occurs
• Resistances: they indicate the areas of price congestion where the upside stops. A break that occurs above the resistance points can be thought of as an uptrend
• Momentum: is an indicator that indicates the rate of change of the price and is usually measured by MACD.
• Relative Strength Index (RSI): represents the relative strength indicator or a gauge of market excesses. The price is represented by a line that tells us whether for a period of time the level is exceeded and is rising or falling
Graph analysis
Understanding the strength of the current trend
Analyze the level of risk
Understanding the potential points of entry into the market
To understand if the trend is strong or not, one must understand what the final goal is. If this is to predict the future price then you need to focus the analysis on price movements to try to understand the future. For this reason, many analysts focus on 3 to 6 month analyzes to spot a trend. It can happen, however, that there are jolts and sudden reactions.
If there is a strong demand this means that there will be a price increase as the lower prices reflect a higher supply. The support and resistance levels should be identified on the chart. In general these are characterized by periods in which prices move in small ranges or intervals over a long period. This tells us that supply and demand are stable, in practice it has stopped. If, on the other hand, the price moves outside the range, one of the two has started to take over.
Even those who use fundamental analysis can use charts because they are more intuitive and easier to read. In fact, it is easy to identify reactions to important events directly on the chart or past and present volatility or to identify the strength of a stock in the market. The study serves precisely to understand what is the correct entry point into the market.
In conclusion, we can say that for a technical analyst it is also essential to manage the psychological aspects. It is strange for a figure who is very number oriented. However, the data cannot be denied because they are there and in general the price reflects the knowledge of all the players involved in the market.
However, these are not absolute theories because every data is subject to interpretation. Your skill lies in making this study flexible, which requires great passion. Once this is done, your earnings and rewards will arrive accordingly.
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