Technical Analysis Overview
By: PipsAngels
The player will show in this paragraph
The basics of Technical Analysis
Technical Analysis is a method of forecasting price movements by looking at pure market-generated data. The primary data that is most commonly analyzed by a technician is the security's price data. The volume of trading for a particular security is also of particular interest in many cases. When applying technical analysis to any market, you will want to utilize methodologies with a proven track record.
It is difficult to be a technician purest, just as it is difficult to be a fundamentalist purest. Even the pure fundamentalists will likely glance at price charts before executing a trade. Analyzing charts from a technical aspect help traders to determine entry and exit, stop loss, and profit taking points or levels for a trade. Charts provide a visual representation of the historical prices of a particular security. Using these charts, many different methods of technical analysis can be applied, such as Japanese Candlesticks, Fib-o-nachi, and Elliott Wave principles, just to name a few.
While technicians concentrate on charts and technical indicators, they don't necessarily ignore fundamentals. Technicians believe that most fundamentals are already represented in the charts and indicators that they use. And a lot of technicians will still keep an ear out for various news reports that may impact the market. But their primary focus is on how various price changes will fit into patterns or trends, as indicated by technical analysis of the data.
Technical Analysis Assumptions:
- History repeats itself and therefore markets move in fairly predictable or quantifiable patterns and signals. Technical Analysis is the means to uncover the patterns and signals given off in a current market by examining past market data.
- Prices move in trends. Prices can move in one of three directions, up, down or sideways. Technicians generally do not believe that price fluctuations are entirely random and unpredictable. Once a trend develops, it usually will continue for a period of time.
- All market fundamentals are shown in the actual market data. So the actual market fundamentals, such as differing opinions, fears, hopes, and moods of traders, do not need to be studied in depth.
The basic data for Technical Analysis includes price, volume, and a variety of indicators based on mathematical representations of patterns and behaviors. These indicators are mathematical manipulations of market data, and are used to determine the strength, direction, and sustainability of a trend. The indicators used are as varied as the technicians that use them, and can include such indicators as Moving Averages, Fibonacci Ratios, Stochastics, Support and Resistance levels, and different charting styles and patterns, just to name a few.
When using a trading method based on technical analysis, it is important to remember to be extremely disciplined in your method. The purpose of technical analysis trading methods is to remove opinions, hunches, hopes and fears from your trading, to minimize negative effects from these personal factors. There is a phrase in the trading world that says... Plan your trade and trade your plan.
For example, when you set a stop loss, hold to it. If you get stopped out, take the loss and move on to your next potentially profitable trade. Too often we will see traders that keep holding on to a losing position, hoping that it will turn back and become profitable. In the meantime, they have lost even more money than they planned on, and possibly missed potentially profitable trades that they could have moved on to.
Remember, the goal in technical analysis is to let your trading method do the work, and to be profitable. If you find a good, profitable trading method, don't second guess it and "change the method". It will hurt you in the long run.
Well, now you know a little about Technical Analysis. We will describe information regarding various Technical Analysis tools in the next lesson. Keep learning and mastering Forex, here at PipsAngels.com. See you soon!
