What is technical analysis in Trading?
Before considering trading in financial markets we must investigate how the data is evolving, what the trends are, what the price movements are, the historical dynamics of the assets, and more....
One of the methods that considers all of this information is technical analysis.
Technical analysis studies a market value, how it has evolved, and its value over time through calculated indicators that vary depending on variables and algorithms. This is all displayed using price charts with up and down movements. The aim is to find statistical trends that will help investment.
With technical analysis the trader see how the market works, and, in this way, patterns can be identified in price movements. These patterns can help us anticipate and/or predict future trends in price and take decisions to buy and sell. It should be a key factor in any solid trading strategy!
There is also another method of analysis with a different approach, which is called fundamental analysis. Fundamental analysis focuses more on internal and external variables that may increase the price, lower it or keep it steady. It takes into account a long list of external influences, such as the relationship between financial statements, future expansion plans, revenue forecasts, profits, growth, the company's sector, the economic environment of the country or countries in which it operates, and more.
Technical analysis focuses on inner market movements and fundamental analysis focuses on external market components. They can complement each other, so it's about taking advantage of each analysis to get a holistic view of what's going on.
Technical analysis uses charts to analyze the market. The most common ones we can find are:
Line charts: Displays only closing prices over a given time interval. The lines are joined to the previous closing price. They're very visual and intuitive to read. Bar Chart: Uses bars to display all relevant price information about a time interval (either short or longer term). The vertical line is created by the maximum and minimum price of the bar. The left mark shows the day's opening price and the right mark the closing price. Candlestick charts: these are the most used by traders as they provide a lot of information about a time interval, and also provide more visibility. These charts show the difference between the maximum, minimum, open and closing prices for each period designated for the candlestick. The body represents the opening and closing prices, and the wicks show the high and low prices of each period.
Another two important concepts in technical analysis are the supports and resistances that the financial market itself marks. They are called "zones", because a specific price moves within a price movement interval.
On the one hand, the support (or the stand) is the price zone below the current price where the price will hit a floor and start to rise. Prices are attractive to investors at these levels, who see higher prices coming. In this way, the supply rises until the fall is balanced and stopped, reaching prices if buyer demand grows.
On the other hand, resistance is the price zone that is on the rise and finds some resistance to keep moving forward. When it reaches this point it bounces and heads downwards. The strength of the sale exceeds that of the purchase. The price rise causes it to be a good time to sell, which generates more supply in the market, and prices are balanced until the rise is stopped, reaching lower prices if buyer demand grows.
To view this information we need to use a program or platform that shows us the information and charts of the data in real-time. Some of these applications are:
NAGA: the most complete trading application (in our view). ProRealTime: a multi-broker platform. MetaTrader: very specialized in Forex investments. NinjaTrader: provides access to futures and forex markets. Tradingview: a simple and very visual trading platform.
These platforms can show different markets and different time periods, you can view charts of different pairs with real-time prices, as well as draw trend lines on price, resistance lines, and support…
Finally, a couple of recommendations: if a trade causes you doubts, it is better not to trade and remember that market behavior is not completely predictable. There are often unexpected situations that change the price trajectory, regardless of the analysis you can do.
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