Today I want to talk about the art of Technical Analysis. This discipline creates a lot of controversy by the experts and by the public. In another future article, I will be explaining some ideas about the Controversies of this discipline. Recently, some of the most important aspects of Finance, such as Quantitative Analysis and Behavioral Economics, have introduced a lot of angles of Technical Analysis, and this position creates an environment of contradiction to most of Modern Portfolio Theory).
In this article, I want to discuss some basics such as what technical analysis is, what types of trader can exist, where you can use technical analysis, what are the main principles of this discipline, or which are the leading indicators that traders use.
What Is Technical Analysis?
Technical Analysis is a financial discipline in which the main focus is the study of market data (prices and volume) to be able to improve the probabilities of forecasting the future direction of the costs in freely traded markets to make profits.
“ I always laugh at people who say “I’ve never met a rich technician” I love that! Its such an arrogant, nonsensical response. I used fundamentals for 9 years and got rich as a technician.” – Marty Schwartz
Where Can You Use Technical Analysis?
You can use Technical Analysis on the analysis of any financial asset that has useful historical data: stocks, futures, fixed-income, forex, commodities, some digital assets (such as Bitcoin), etc.
The study of TA is made through Charts.
What Is Exactly a Chart?
A chart is like a map that leads you and guides you.
The more information that the map is providing, and the more technical and psychological skills you develop, the more chances of getting to your desired destination, which is making profits from the market.
Most people who trade the markets through TA usually believe that “the market is always correct”.
Is the Market Always Right?
There are a lot of controversies around this question even inside the community of technical traders.
On this occasion, I am not going to talk about in-depth personal opinions and discussions. I will be just talking about the general basics.
Traders who think in “the market is always correct” believe in the idea of the efficient market hypothesis (EMH). Essentially means that all the internal and external fundamentals factors that influence the demand and the outlook for some company’s stock price are already discounted and factored into the demand and supply curve, the market price.
In other words, at any given point in time, the market price of an asset reflects all available information so in that exact moment, it represents the true value of the asset.
Technical Analysis is based on on the following Economic Theories:
-Market Value is disposed of by the Equilibrium of Supply and Demand.
-All kinds of factors, rational or irrational, determine Supply and Demand.
-Most of the time, markets are moving up or moving down, despite all the fluctuations and lateral movements.
-Changes in the Trend comes from changes in Supply and Demand.
-Trend Changes can be perceived in the Charts.
-Some Certain Chart Patterns appear with frequency, and this can be valuable information for traders to take positions based on probabilities.
Which Are The Main Principles of Technical Analysis?
Market Discounts Everything
Technical Traders believe that the price is a total reflection of all the factors and forces of the market. These forces include all macroeconomic and fundamental data. This fact removes the necessity to analyze or look at other factors that do not price movements.
Prices Move In Trends, and Prices Fluctuations Are Not Random
Technical Traders believe that prices always move in trends and are repetitive, many times in a predictable way. This idea means that market price movements are not purely random, and it creates specific patterns that can be recognized.
History Tends To Repeat Itself
Technical traders believe that an individual’s emotions are one of the main factors that make prices move, and these prices move are reflected in the Charts with specific patterns that can be seen and analyzed in the Charts.
It is vital to notice that any asset prices in freely traded markets are always influenced by psychological factors: fear, greed, cognitive bias, misinformation. All these factors have been affecting the demands from its beginning, and this fact has never changed.
For instance, I believe that an excellent example of this can be when it comes to trading a digital asset such as Bitcoin Private Currencies, Bitcoin Basics, And 3 Key Examples To Clarify The Concept. Believe it or not, this fact probably won’t change ever because it’s human nature. Human nature never changes, and this is the main reason why Technical Traders discount Fundamental Analysis.
What Types of Technical Traders Exist?
There are two ways to trade any asset in any market:
A) Predictive trading:
-People who trade the markets in a predictive way, use their market analysis to make a plan to make potential predictions about future market moves.
-Usually, these people make their money by selling their predictions to other individuals in the form of Newsletter or Trading Alerts. These individuals could be named as the market “Gurus.”
B) Reactive trading:
-Traders who reactively trade the market using technical analysis are not usually really “public people” as market “Gurus” are. These traders typically find publicity a distraction for their “core business,” which is trading the markets.
-Long-term traders or Short-term traders, who trade their own money or other people’s money reactively using Technical Analysis Techniques, analyze themselves the data and make their own decisions to try to take profits from the market.
Which Are The Main Indicators In Technical Analysis?
-Volume and momentum indicators, such as CCI.
-Support and Resistance Levels.
Through the study of Technical Analysis, every trader intends to get the knowledge and skills to trade the market reactively.
Reactive traders don’t try to predict the market with a Crystal Ball or to make predictions like a Holy Grail.
Most traders don’t care about the news.
They just have a Trading Plan and Trading System.
They follow it with discipline so they can increase the probabilities of making profits through price movements of any asset that is generally subject to forces of supply and demand. Many reactive traders look at charts and technical indicators, but there is some number of traders that also analyze and track data such as trading volume or open interest figures.
This article is a short and brief piece explaining every basic of Technical Analysis in a way that everyone, no matter the level of knowledge, could have a clear perspective and understanding of what Technical Analysis is.