Technical Analysis Principles

What is technical analysis?

Technical analysis is a method of forecasting price movement based on the market behavior in the past. This type of analysis is based on three general principles:

1. Market discounts everything

External factors always have an impact on the price. However, technical analysis implies that political, economic and psychological factors don’t play a significant role, as the key indicator of the possible price behaviour is the price itself. Any slight influence of factors is reflected by a price, that is why it is the object of study.

2. Prices move in a certain direction

As traders say, the trend is your friend. Indeed, knowing the current price direction is half the battle. There are three trend types:

• Bullish - when price moves up

• Bearish - when price moves down

• Flat - there is no certain price direction

Basically, the technical analysis is based on the assumption that the trend will either continue or reverse. Consequently, two types of graphical objects on price charts are usually distinguished: the continuation and reversal patterns.

3. History repeats itself

Prices tend to move in circles, which is connected with market psychology. The investor sentiment is easy to predict as it is based on emotions like fear or excitement which are analyzed with the help of patterns. The patterns, in turn, help to understand the trend. Interestingly, technical analysis was introduced quite a long time ago, but those patterns are still relevant because they are repeated all the time.

The market dynamics is primarily studied by means of charts during a technical analysis. The main tools are:

• Oscillators

• Japanese candlesticks

• Bar charts (intervals)

• Line charts

• Trend indicators

• Wave analysis

Technical analysis is successfully used by professional traders and analysts of Forex. Their long experience proves practicability of using technical analysis in trading.