Technical analysis is the method of forecasting the market prices (stocks, currencies, commodities, etc.) by analyzing the past market prices.
The past market prices are analyzed by applying various technical tools on price charts. Various technical tools include trend lines, Fibonacci, RSI, chart patterns, candlestick patterns, and many other indicators to forecast the future market price.
However, there are no any pre-determined universal rules on how to use these technical tools to make the right trading decision. Analysts have been known to combine these tools to make their own unique trading strategies.
Basic assumptions of technical analysis
The technical analysis is originated under certain basic assumptions. The basic principles/assumptions of technical analysis are:
- Market prices are determined solely by the demand and supply forces.
- Market prices tend to move in trends.
- Imbalance in supply and demand causes reversals in trends.
- Imbalance in supply and demand can be detected in charts.
- Chart patterns tend to repeat themselves.
Technical analysis focuses solely on the price of the security and ignores all the other factors that affect the price of the security. Technical analyst believes that all the other factors affecting the price of the security are factored in to the price. Therefore, it’s useless and impossible to focus on all those factors consisting of complex sets of emotions like fear, greed, hope, expectations and other psychological factors.
Technical analyst also believes that the market is not random and there are occurrence of predictable repetitive patterns in the market. Technicians hold the notion- “History repeat itself.”
Technical analysis is the behavioral approach of investing. It is determined to understand the psychology of the investors by analyzing the supply and demand for the security at different price levels.
Although the technical analysis is criticized by some of the academicians, the professional traders find it useful. Many researches, who carried it out in the past, have proven the use of technical analysis to be helpful in forecasting the future market prices to a great extent.
We are determined to guide you step by step on the subject of technical analysis in our technical analysis school.
Related Article: Introduction to Forex Trading
History of Technical Analysis
Although the technical analysis is thought to be an ancient method of analyzing the market, its history hasn’t been recorded properly. It’s difficult to say exactly when the technical analysis originated. But it is believed that the real technical analysis came to the play from the rice market of Japan. Sokyo Honma, a Japanese rice trader became very wealthy by being able to predict the price of the rice based on the previous day’s price.
Charles Dow is considered as the father of modern technical analysis as he developed the Dow theory which is the groundwork for technical analysis. Dow had introduced the concept of market index to measure the performance of the stock market.
As the computers and technologies advanced, analyzing the market technically got easier and better. Today, traders and investors have an easy access to the sophisticated technical tools which allows them to perform advance technical calculations and test their strategies in a very short period of time.
In today’s highly advanced markets, technical analysis is crucial to all the traders ranging from a newbie to the professional hedge fund managers. Today, technical analysis is considered as one of the most powerful methods of analyzing the financial markets. The growing charm of technical analysis in today’s financial trading business is overwhelming.