Technical analysis of financial markets: basics

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technical analysis, Dow theory, technical analysis theory, theory of technical analysis, basics of technical analysis

Technical analysis of financial markets can be used by both beginners and professional traders. At the beginning of the article we will consider the basics of technical analysis, analyze the advantages of this approach, share our thoughts on this topic.

Fundamentals of technical analysis

Technical analysis is the analysis of the history of quotations to determine the price movement. Proponents of technical analysis believe that the behavior of the market is repeated, and the fundamental factors (politics, Economics and psychology) are already taken into account in the price.

Therefore, technical analysts (often called "techies"), when making decisions in the financial market, rely on charts. Based on the theory of technical analysis, the initial data are quotes: open, close, minimum and maximum prices for a specific period and trading volumes.

Technical analysis originated in the 17th century in Japan. At that time, rice traders tried to fix the change in prices for their goods, then on the basis of recorded data they tried to predict where the price would move.

The Theory Of Charles Dow

technical analysis, Dow theory, technical analysis theory, theory of technical analysis, basics of technical analysis

The modern theory of technical analysis was described in the 19th century by journalist Charles DOE. To this day, this theory is relevant. Charles DOE's theory is based on a number of postulates.

Price includes all

According to Dow's theory, everything that happens in the financial market is already taken into account in the price. In this case, the price does not change by chance, but is the result of the addition of mainly multidirectional actions of different market participants.

All cyclical

If in the past, certain figures gave signals about the continuation or change in the direction of the price movement, then the appearance of the same signals in the future is likely to indicate the same. Technical signals that were 100 years ago are still effective today.

Prices move in the direction

According to the theory, the current trend will continue rather than change direction. Prices will move in a given direction until there are reliable signs of a reversal. Therefore, inexperienced traders are not recommended to "play" against the trend.

Trends are confirmed by volumes

If volumes grow in a growing trend and volumes decrease in a downtrend, then the price is likely to continue to grow. If the growing movements are accompanied by a decrease in volumes, and the downward movements are accompanied by an increase in volumes, then the price is likely to fall. That is, the trading volume should grow in the direction of the trend.

Assets are moving consistent

When analyzing and making investment decisions, you should monitor the correlation of several financial instruments. It is important to take into account that the correlation changes over time. Accordingly, it is important to analyze the situation in other market sectors.

The modern form of technical analysis emerged with the advent of computers in the 1990s. Modern traders and investors can in a fraction of a second to make those calculations that previously took days or even weeks, because before the graphics had to draw yourself.

Technical analysis for beginners

technical analysis, Dow theory, technical analysis theory, theory of technical analysis, basics of technical analysis

There are 3 types of graphs in technical analysis:

  • Linear;
  • Barstool;
  • Candlestick.

To date, the most informative and popular is the candlestick chart. In one of the following articles we will introduce you to the basics of candlestick analysis.

Technical analysis can be carried out by computer indicators that allow you to quickly get acquainted with the current statistics of the price movement and discard unnecessary noise.

Not all traders use indicators, believing that they only complicate the analysis. Such analysts look only at the price, assessing the formations and patterns formed on the chart. In the future, we will focus on these methods in more detail.

The logic of technical analysis is that each point (bar, candle) on the chart reflects the opinion of millions of traders, showing the ratio of supply and demand at the moment. Market participants determine the further direction of price movement, opening a deal in a particular direction. They buy, believing that the price will go up, sell – if they expect the price to fall. If market participants are not sure where the price will go, they do not enter into transactions and the price stands without movement in the side range.

Technical analysis does not try to understand the reasons why prices are moving in one direction or another. It is important for him to assess the mood of the market according to the schedule, to analyze the behavior of players. For these purposes, it is enough to look at and analyze the changes in prices and volumes.

Why "technology" is so easy to trust other traders? It's simple, it's psychology: in identical circumstances, people tend to make the same decisions. Technical analysts know this and are trying to predict where the price will go today.

Is it worth applying technical analysis

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It is important to remember that the price movement is 100% impossible to predict. It is a scientific fact. However, technical analysis is a very useful tool to understand charts and select points of opening and closing positions. Technical analysis will really increase your chances of making a profitable deal.

Today, the Internet has a lot of trading strategies and courses that promise millions of earnings in the financial markets, based on some signals of technical analysis. We do not share the optimism of the authors of these strategies. Since such a simplified presentation of the material creates an illusion of omniscience and false confidence among beginners, which is quickly converted into a loss of Deposit. Only these "teachers"have a stable income. Hence the crowd of failed traders, shouting that the financial markets – a continuous divorce for money.

With illiterate use, technical analysis will not lead to anything good.

Knowledge and understanding of the basics of technical analysis – an important component of stock literacy, but, of course, not a guarantee of absolute profitability of your investment. Financial markets are an interesting and multifaceted model that should be studied and monitored. Technical analysis should be paired with fundamental analysis. The more experience you have in the financial markets, the more books you read and the more "crises" you experience, the more effective the methods of technical analysis will work for you.

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