BASICS OF TECHNICAL ANALYSIS
Technical analysis is a practice that focuses on the study of price movements by the use of charts, tools, indicators, and the likes. The working idea behind it is that a trader can look at historical price movements and analyze the current trading conditions to determine the future price movements.
One of the main assumptions of technical analysis is that the market reflects all available information on the price movements.
“History Repeats Itself”
The belief that history tends to repeat itself is another important assumption by technical analysts. If a price level held at a specific support and resistance in previous periods, technical analysts and traders will have their eyes set on that level and will rely on that historical price level for their next trade.
In a nutshell, technical analysts look at historical price movements and to predict future price movements. They look for similar patterns that have been witnessed in the past and will come up with trade ideas in the assumption that the price will behave the same way that it behaved before.
Charts and Tools
The very first things that will pop up in a trader’s mind when we talk about technical analysis are charts and tools, which are an analyst’s instrument to gather and analyze the data found in the market.
By using these charts and tools, you can visualize the price movement of the currencies you want to trade. They can help you spot patterns and trends, which are what you need in order to plot your next trading decision. In this patterns and trends, you will spot trading opportunities.
Technical Analysis is very Subjective
For traders who use technical analysis, price patterns and signals become self-fulfilling, meaning if there are more forex traders who are looking for the certain price levels and patterns, the more possible that these patterns will exhibit themselves in the market.
On the other hand, technical analysis is very, very subjective.
Suppose there were two traders that look at the same exact currency price movement chart. Of course, they see the same data. And of course, they are studying the same chart. However, one of them may interpret the chart in one way, and the other may come to a different conclusion.
More importantly, they may have different interpretations of the chart, but they can both be right—or wrong.
What’s important is that the traders knows and understands the concepts that fall under technical analysis. This is to ensure that the trader won’t get bogged out when an analyst shows him or her some Fibonacci, Bollinger bands, or pivot points.
Combination of Tools
Remember that different tools have different functions. Some of them are useful for spotting support and resistance levels, while others give you more ideas about the swings of the price movements.
What you can do is determine which tool or indicator fits your trading strategy better. Even more so, don’t stick to only one kind of indicator or chart. Use them in conjunction with one another so you can have a better feel of the next price movement.