Technical Analysis, Charting Market Price, What Is It?
64The history of technical analysis stems from the Dow Theory which was developed in the early 1900s by Charles Dow.
The main principles of the theory include:
1) price discounts all known information,
2) price movements follow trends and are not completely random, and
3) history repeats itself. A direct consequence of the Dow Theory is the widely followed Dow Jones Industrial Average.
Previously all this data had to be manually drawn on charting paper before the existence of computers to simplify and organize the data.
Most if not not all technical analysis price charts today are created and maintained on computers. Having an accurate price chart allows you to identify trends in price so that you can make correct decisions in trading forecasts.
In addition the use of price charts allows you to make much more logical trading decisions instead of relying on emotion or 'gut feelings'.
Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future.
Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time.
It is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
Profitable trading depends on accurate information. The more you know, the more you stand to gain. Technical analysis is a well established technique for gathering the information you need to assess market behavior and make well-considered trading decisions.
The goal is always to buy low and sell high. The challenge is to determine when these highs and lows have been reached.
There are a million different ways to trade the financial markets. Maybe more. Swing traders, data players, Elliot Wave analysts, momentum traders, Gann theorists, spread traders, arbitrageurs – not to be confused with risk arbitrageurs – and correlation players all help to price and misprice assets.
The music of the market reflects the instruments these traders use.
There are a couple of plausibility arguments:
One is that the chart patterns represent the past behavior of the pool of investors. Since that pool doesn't change rapidly, one might expect to see similar chart patterns in the future.
Two is that the chart patterns display the action inherent in an auction market. Since not everyone reacts to information instantly, the chart can provide some predictive value.
Three is that the chart patterns appear over and over again. Even if I don't know why they happen, I shouldn't trade or invest against them.
Four is that investors swing from overly optimistic to excessively pessimistic and back again. Technical analysis can provide some estimates of this situation.
Technical analysis is applicable to Forex, stocks, indices, commodities, futures or any trading instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low or close for a given security over a specific time frame.
The time frame can be based on intraday (tick, 5-minute, 15-minute or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume or open interest figures with their study of price action.
Technical analysis shows a way out to the serious player who is interested in optimising returns on investments. I would advocate every player who has some interest in forex should have a working knowledge of technical analysis.
Using the maxim "knowledge is power" , technical studies provide handy tools akin to the versatile Swiss army knife to all players.
Never trade against the trend - a fundamental principle in technical analysis. That's easy enough to follow, but how do you determine the trend?
Without getting ahead of myself this topic will be covered in a moment and I may dedicate this for a separate article to do it justice.
The fact that prices tend to move in trends is undeniable. At some point, the market becomes "unbalanced" and the result is a change in trend.
Technical studies are based entirely on prices and do not include balance sheets, P&L accounts (fundamental analysis), the assumption being that the markets are efficient and all possible price sensitive information is built into the price graph of a particular market security / index.
Using technical analysis to predict the market is the wrong concept. Many people believe that by identifying patterns formation, they can predict the price movement.
THEY CAN BE WRONG !
No one can predict the market, not even Investment gurus. No one can predict where and when the market is going to move. The market tells investors what to do, when to move, when to enter or exit.
Technical analysts watch for particular formations that signal good opportunities to buy and sell. The method can be used for long-term investing, shorter-term trading and day trading.
The analysis itself is usually some sort of mathematic formula that is calculated for every day in the history, this then creates a plot on the chart. The technical analyst interprets this information to make their trading decision.
The primary tools of Technical Analysis are a chart (of price and volume).
Those who subscribe to technical analysis are sometimes called chartists or technicians
The more common technical tools are moving averages and relative-strength indicators, or RSIs, often referred to as "momentum."
One of the most widely used technical indicators is simple moving averages such as 50-day (10 weeks calculated using five trading days per week) and 200-day moving averages based on closing prices.
These would be considered medium-term and long-term moving averages. Short-term would be in the range of 20 day or four weeks or less.
The interesting perspective on moving averages is that they may just be self-fulfilling indicators. Since so many investors and traders use them, it's possible that once moving-average trends are triggered, enough traders and investors act on them to actually make the indicator relevant.
Ever heard of Japanese candle stick? Fibonacci numbers? Relative Strength Index? Moving averages? Pivot points? Elliot Wave? These are some of the charting method that FX traders like to use during trades.
Okay so now that you have an idea of what technical analysis is I will begin to break down each component and terms for you in subsequent hubpages so stay tuned.
To Your Trading Success,
(c) Manny Mullins
