Technical analysis is a set of methods for determining the moment for the transaction, based on the study of price trends. The analysis is carried out by construction of charts and previous market behavior research in order to predict the price movement for the future.
Technical analysis may comprise graphical and mathematical analysis. Graphical analysis involves visual study of charts, the construction of lines, figures and channels, through which you can identify important psychological levels, identify trends, models and configurations. Mathematical analysis is carried out using indicators that quickly calculate all price movements of a currency pair and display the obtained results on the screen in form of lines, numbers, arrows or histograms. They will prompt the trader the expected future behavior of the market for the selected instrument. Four types of prices: – minimum, maximum, opening price and closing price are initial data for the technical analysis.
Technical analysis has three hypotheses
- The most important one states that market movements take everything into account. That is all possible factors: political, economic, acts of nature and other events are already taken into account in the current price. Therefore, there’s no need to analyze external factors, all it takes is to analyze the price chart.
- The second one claims that price movements are rationalized and dependent on certain trends. The main goal of the trader is to determine the direction of future price movement, i.e. trend determination. Supposing that price fluctuations in the Forex market are random, the possibility of applying mathematical calculations to predict market behavior will be unnecessary.
- The third one claims that history repeats. This implies that having carefully studied the history of price movements in the past, we can more than definitely predict the price movement in the future. Since, traders will most likely react to similar events in the future as well as in the past, because it’s normal for human psychics. And this makes the market behavior quite predictable.
A vast majority of traders use technical analysis, because it is quite simple and most affordable method to predict the price movement in the future. It does not require the analysis of economic and political events. Any trader can use technical analysis, since there are many different tools.
Financial analysts state that this type of analysis leans on three pillars: short-term trading of large investors, limited amounts of remaining majority of investors and a desire to avoid risk.