Trading with Confidence thanks to Technical Analysis
To the untrained eye, spotting trends, patterns, and forecasting market movements is difficult. However, everything becomes a lot clearer when technical analysis is performed. This body of research is based upon the work of the founder of Dow Jones & Company, Charles Henry Dow. This guru used his market insights to gain a deeper understanding of price movements (demand and supply) in the markets. Technical analysis is used for a wide range of financial instruments, including: stocks, indices, commodities, Forex etc. In fact, any underlying security can be evaluated with technical analysis, provided there is past performance to work with. With technical analysis, it’s all about supply & demand considerations to gain a deeper understanding of how stock markets function. It’s also a valuable resource for identifying trends and patterns and generating profits accordingly.
At a basic level, technical analysis uses patterns of prices to understand any trends in the demand & supply paradigm. Once these patterns are understood, traders and investors gain valuable insights into the mechanics of price movements. With technical analysis, there is a fundamental assumption: market behaviour is predictable and repetitive. In other words, history is likely to repeat itself, given that market players base many of their decisions on emotional considerations. The key elements driving the market include fear and greed. When traders and investors are fearful of a bearish market, they tend to sell financial instruments, and when traders and investors are greedy, they tend to buy financial instruments. This mentality has pervaded markets since the dawn of time and is the bedrock upon which all trading activity is based.
Historical Price Movements
With technical analysis, focus is placed on historical price movements. These prices relate to a specific financial instrument, such as stocks, bonds, currencies, commodities, indices etc. The price movements over time are plotted on a two-dimensional graph and trends are analysed to ascertain whether an assumption can be made regarding future price movements. Technical analysts do not base their investment decisions on supposition alone. Various other factors are considered such as fundamental analysis of the macroeconomic situation. Picking the right stock, currency pair, or index requires care. For many traders, the real profits are generated from trading large quantities of assets with small price movements. For example, if 100,000 shares are purchased and the price rises by $.10 per share, that translates into a $10,000 gain. It’s also important to set stop loss levels to ensure that when the markets turn the other way that losses don’t pile up on volume trading with leverage.
Experts recommend reading up on all aspects of technical analysis before simply delving into the financial markets. Technical analysis for beginners is central to your success in the financial markets. Long before you get started with real money trading, it’s important to remove emotion from the equation. Technical analysis is not specifically about prices, it’s about push and pull factors that determine prices. In other words, technical analysis is focused more on understanding demand & supply considerations and how that will cause an impact on price movements. When emotion is removed from the equation, it becomes a lot easier to understand how to use charts to objectively assess investment-related decisions. With charts, you can gain a broad perspective on market activity. For most folks, technical analysis is a powerful tool for currency movements over the short-term. Short-term moves are a focal point of currency traders, given the inherent volatility in FX trading. All professional traders include technical and fundamental analysis in their market trading activity.
Technical analysis considerations
- Chart Analysis
- Spotting trendlines
- Are markets overbought/oversold?
- Looking for moving averages (MAs)
- Looking for support and resistance levels
With technical analysis, there are multiple different charts and patterns that can be highlighted to determine which way markets are likely to move. However, technical analysis is not a panacea to understanding market activity. It does not yield 100% accurate results at all times. If the evidence does not point clearly in one direction or another, it is foolhardy to assume, or to extrapolate, a pattern that is not there. Charts have predictive power, over the short-term, however too much analysis can yield false positives. As a currency trader, the trend is your friend over the short-term. Spotting trends and patterns with technical analysis will certainly yield dividends over time.