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What is a technical analysis?
Technical analysis (TA) is a study of the history of prices and trade volumes in order to identify patterns on the basis of which price dynamics is predicted. Technical analysis is applicable to any asset with the history of prices in the past, including cryptocurrencies, fiat money, exchange products and shares.
Who and when has developed a technical analysis?
Primitive forms of technical analysis appeared in Amsterdam in the 17th century and in Japan in the XVIII century. The modern one arose thanks to the works of American journalist Charles DOW, the founder of the publication The Wall Street Journal. Dow was one of the first to notice that assets and markets are often developing within the framework of trends that can be fragmented and analyzed. Based on observations, he created a concept known as the theory of DOW.
Key provisions of the theory of DOW
- Pricing is due to everything that happens on the market; All real, past and future factors (demand, regulatory changes, expectations of market participants, etc.D.) already taken into account at the current price of the asset and the volume of trading. Studying the dynamics of price/volume is enough to predict the likely development of events in the market.
- The main thing is “what”, not “why”. The focus of the technical analytics is the price of an asset, not various variables producing price movement. Price – a reflection of opposite forces of proposal and demand, which are closely related to the emotions of the fear and greed of market participants.
- The price movements are not powerless, but are subordinated to the trends. The totality of changes in the balance of supply and demand for a certain period of time forms trends (brief, medium and long-term). If the demand exceeds the supply, an upward trend occurs, if the supply exceeds demand – descending. When demand and proposal balances each other, a side price trend (flt) arises.
- History is inclined to repeat. You can predict market psychology, since traders react stereotypically to similar factors.
How technical analysis differs from the fundamental?
Unlike the approach accepted into the approach, where price stories and trade volumes are of paramount importance, fundamental analysis (FA) is designed to evaluate the internal value of the asset and takes into account not only quantitative, but also qualitative factors, including:
- financial and production indicators;
- management and reputation of the company;
- market competition;
- general condition of the industry and t. D.
Based on these data, future asset indicators are predicted.
FA is more effective and reliable in markets working in normal circumstances, with a large volume of bidding and high liquidity. Such markets are less susceptible to pricing manipulations and external influences that give rise to false signals and make that tolerable.
Technical analysis is used mainly as an tool for predicting the price movement and market behavior, fundamental analysis as a method for assessing the value of the asset in accordance with its potential and context.
That is popular among short -term traders, FA – among stock managers and long -term investors.
How technical analysis works?
The technical analysis discusses and analyzes patterns – typical figures forming on price schedules (“double bottom”, “triangle”, “flag”, etc. D.), as well as levels often based on previous maximums or minimums of prices. With the approximation of the price to previous peak values, market participants expect similar turns and strive to put up appropriate trade orders, which in turn forms the levels of resistance and support.
For a technical analysis of prices, levels and patterns, graphs are used that display a change in prices over a certain period of time. The most popular among traders are the graphs of Japanese candles, linear, as well as histogram (bars).
Japanese candles can be used both independent models of the TA, and in combination with additional tools – geometric figures, indicators, oscillators, etc. D.
Patterns are usually detected on graphs by traders independently, without the use of auxiliary mathematical tools.
- Horizontal line – a straight line denoting the price levels on the graphics.
- Trend line – inclined line to identify the trend.
- The calculation lines formed on the basis of mathematical processing of the key values specified by the user (Fibonacci levels, Ganna lines).
Technical indicators – additional graphs formed on the basis of recalculating the values contained in the base schedule of prices. They have at least one variable parameter, the displayed results can significantly change from the value. The following indicators and metrics are used within the framework of it:
Simple sliding average (SMA), calculated based on the closing price within the prescribed time.
The exponential sliding medium (EMA) is a modified version of SMA, which takes into account the latest rather than old closing prices.
Relative force index (RSI) – a type of indicators known as oscillators. Unlike simple sliding medium, which simply track changes in time prices, oscillators apply mathematical formulas to the price data, receiving indications that fall into pre -installed ranges. In RSI, this range is from 0 to 100.
Bolinger stripes (BB) – an indicator consisting of two side strips flowing in the sliding medium. It is used to determine the potential conditions of overbearing and respuence of the market, as well as to measure market volatility.
Along with basic and simple tools, it uses tools based on other indicators:
Stochastic RSI is calculated through the use of a mathematical formula to ordinary RSI.
The divergence indicator of the sliding medium (MACD) is generated by subtracting two exponential sliding medium (EMA) to create the main line (MACD). Further, with the help of the first line, another EMA is generated and the second, signal, line arises. There is also a histogram (graphic representation of statistical data) MACD, calculated on the basis of differences between these two lines.
Indicators, along with the fact that they help to identify common trends, allow you to get data on potential entry and output points (purchase and sale signals). Signals are generated when certain events occur on the indicator schedule. For example, the value of the relative force index (RSI) in 70 or more may indicate a state of market overlap, and the RSI falls to 30 or less usually indicates the resold of the market.
That trading signals provided are not always accurate. Indicators create a significant volume of “noise” (false signals), which is especially relevant in cryptocurrency markets, which are much smaller and volatile than traditional financial markets.
Critics call the “self -filled prophecy”, that is, the forecasting of events that occur only because a large number of people allow the likelihood of a certain scenario. Since numerous traders and investors use the same indicators, such as support and resistance levels, these schemes become working. On the other hand, each trader analyzes market movement graphs in its own way using many available indicators. This means that a large group of techanalists cannot use the same strategy.
Although she is dealing with empirical data, it is not free from the influence of addiction and subjectivity. A trader, predisposed to certain conclusions about the asset, may well manipulate tools to reinforce his point of view. Quite often this is done unconsciously. Technical analysis also fails in periods when the market does not provide distinct patterns or trends.
Many consider the most rational approach the combination of FA and that: the first method works well for long -term investment strategies, the second for short -term transactions.