It is an analysis that aims to predict future market movements based on past price movements and volume of data. The technical analysis approach is widely applied to stocks and other assets in traditional financial markets but is also an integral part of trading digital currencies in their market.
The Technical Analysis (TA) chart is strictly based on historical price action. As opposed to fundamental analysis (FA)
Which takes into account multiple factors about the asset's price. Therefore, it is used as a tool to check an asset's price fluctuations and volume of data and many traders use it in an effort to identify favorable trends and trading opportunities.
While rudimentary forms of technical analysis appeared in Amsterdam in the 17th century and in Japan in the 18th century, modern TA (Technical Analysis) is often traced back to Charles Dow's work as a financial journalist and founder of The Wall Street Journal. Dow was one of the first to notice that individual assets and markets often move in trends that can be fragmented and examined. Later on, his work gave the Dow Theorem which encouraged further developments in technical analysis.
In the early stages, the first approach to technical analysis was based on handmade papers and manual calculations, but with the advancement of technology and modern computing, technical analysis (TA) has become widespread and is now an important tool for many investors and traders
# How does technical analysis work?As mentioned before, technical analysis is simply the study of the current and past prices of an asset. The basic assumption of technical analysis is that fluctuations in an asset's price are not random and generally develop into specific trends over time. Technical analysis, at its core, is the analysis of market forces of supply and demand which represent the overall market sentiment. In other words, the price of an asset is a reflection of the opposing buy and sell forces and these forces are closely related to the sentiments of traders and investors (mainly fear and greed).
It is worth noting that technical analysis is more reliable and effective in markets that operate under normal conditions with high liquidity. Large-sized markets are less prone to price gouging and unnatural external influences that can create false signals and render technical analysis useless. Traders use a variety of charting tools known as indicators in order to examine prices and ultimately identify good opportunities. Technical analysis indicators can help traders identify current trends and also provide useful information about trends that may emerge in the future. Some traders use multiple indicators as a way to reduce risk since technical analysis indicators are subject to error
# Popular technical analysis indicatorsUsually traders who use technical analysis use a variety of different indicators and metrics to try to determine market trends based on charts and historical price action. Among the many indicators of technical analysis, the Simple Moving Average (SMA) is one of the most used and well-known examples. As the name suggests, SMA is calculated based on the closing prices of an asset over a specified period of time. Also there is the Exponential Moving Average (EMA) which is a modified version of the SMA that weighs recent closing prices more heavily than the oldest.
Another commonly used indicator is the Relative Strength Index (RSI) which is part of a class of indicators known as oscillators. Unlike simple moving averages that simply track price changes over time, oscillators apply mathematical formulas to price data and then produce readings that fall within pre-defined ranges. In the case of the RSI indicator, this range goes from 0 to 100.
The Bollinger Bands (BB) indicator is another very popular oscillator indicator used among traders. The BB indicator consists of two sideways bands that flow around a moving average line. It is used to discover overbought and oversold conditions in the market as well as to gauge market volatility. Besides the basic and simpler technical analysis tools, there are some indicators that rely on other indicators to generate data. For example, the Stochastic RSI is calculated by applying a mathematical formula to the normal RSI. Another common example is the Moving Average Convergence Divergence (MACD) indicator. The MACD is created by subtracting two EMAs to create the main line (MACD line). Then the first line is used to create another EMA which leads to the second line (known as the signal line). Additionally, there is a histogram of the MACD, which is calculated based on the differences between these two lines
# Trading signalsAlthough indicators are useful in identifying general market trends, they can also be used to provide insights into potential entry and exit points (buy or sell signals). These signals may be generated when certain events occur in the indicator chart. For example, when the RSI indicator produces a reading of 70 or more, it may indicate that the market is in an overbought condition. The same logic applies when the RSI drops to 30 or below which is generally seen as an indication of an oversold condition in the market. As mentioned earlier, the trading signals provided by technical analysis are not always accurate and there is a large amount of noise (false signals) produced by technical analysis indicators (TA). Especially in the cryptocurrency markets which are much smaller than the traditional markets and thus more volatile
# CriticismAlthough TA is widely used in all types of markets, it is viewed by many professionals as a controversial and unreliable method that is often referred to as a "self-fulfilling prophecy". This term is used to describe events that happen only because a large number of people assumed they would happen. Critics argue that in the context of financial markets, if a large number of traders and investors rely on the same types of indicators as support or resistance lines, the chances of success of these indicators increase. On the one hand, many supporters of technical analysis argue that each chart move has their own method of analyzing and using the many indicators available which implies that it is virtually impossible for a large number of traders to use the same specific strategy
# Fundamental Analysis (FA) and Technical Analysis (TA)The basic premise of technical analysis is that market prices actually reflect all the fundamental factors related to a particular asset. But unlike a technical analysis approach that focuses primarily on historical price data and volume (market charts), fundamental analysis (FA) relies on a broader investigation strategy that focuses more on qualitative factors. Fundamental analysis considers that the future performance of an asset depends on more than just historical data. Especially since fundamental analysis is a method used to estimate the intrinsic value of a company, business or asset based on a wide range of macro and microeconomic conditions such as the company's management, reputation, competition in the market, growth rates and health of the industry.
Therefore, we may consider that unlike technical analysis which is mainly used as a predictive tool for price action and market behavior, fundamental analysis is a method for determining whether or not the value of an asset is overvalued according to its context and potential. While technical analysis is mostly used by short-term traders, fundamental analysis tends to favor long-term money managers and investors. One notable advantage of technical analysis is the fact that it relies on quantitative data and as such it provides a framework for conducting an objective investigation of price history which eliminates some of the guesswork that comes with the more qualitative approach to fundamental analysis.
However, technical analysis remains influenced by personal and subjective bias despite dealing with empirical data. For example, a trader who has a strong willingness to reach a specific conclusion about an asset will likely be able to manipulate the tools of technical analysis to support his bias and reverse his preconceptions and this in many cases occurs without realizing it. Moreover, technical analysis can also fail during periods when the markets do not provide a clear pattern or trend.
#Concluding thoughtsDespite criticism and long-standing debate about the best method of analysis, many consider the combination of technical analysis and fundamental analysis a more rational choice. While fundamental analysis is usually associated with long-term investment strategies, technical analysis may provide insight into short-term market conditions that may be useful to both traders and investors for example when trying to determine appropriate entry and exit points.
I hope this topic provided the information that beginners need to understand technical analysis
Translated from source:https://academy.binance.com/ar/economics/what-is-technical-analysis
