What is Technical Analysis?

What is Technical Analysis?

Is Technical analysis a suitable approach?

Technical analysis (TA) refers to the study of statistical information and price action behavior to further predict its future movements. This form of analysis has been used widely in various fields regarding finances, including cryptocurrency.





How TA is performed



For utilizing technical analysis, traders require knowledge behind graphs and tools, which can be applied by studying the past behaviors of price action, in order to predict the future trend and find the most profitable route of investment. Such tools can include Chart patterns, Trend lines, Resistance and Support lines, Candlesticks, Indicators and various theories in the field.



With these helpers, expert analytics are able to foresee potential movements and the reasons supporting them as well.





Indicators



Indicators refer to tools that can be utilized to collect the traded assets in a market, apply them into mathematical calculations and assess in a form that is better understood for the ultimate use of supporting one’s buying and selling decisions.



Frequently used indicators include; the Moving average, Bollinger bands, MACD and the RSI, all of which attain differing characteristics, including varying use cases and statistical information, which lead to different mathematical calculations, depending on the premise of use.





Support and resistance indicators



Support lines refer to the price level drawn to indicate the control of descent, whereas resistance lines mark the control of the price’s ascension.



The Support and Resistance indicators are used widely in various financial markets to indicate the price level in which assets are bought and sold at an exclusively high volume. When prices ascend or descend to this specific line, it is projected that there will be an upcoming wave of reactions from the price chart: whether it's bouncing back from a trend or stopping after moving in a direction for a period of ascension. In contrast, they can also indicate that if prices break through this barrier line, the graph would possibly continue in that particular trend.



The indication of Support and Resistance lines can often be set when there are signs of prices making a reversal or obvious signs of its movements being stopped at certain points. The strength of the Support or Resistance line can be defined by the trading volume of an asset at a price point.





Trend lines



Drawn by connecting various points on a graph with an intersecting line, trend lines, true to their names, are utilized to indicate probable upcoming trends on a price chart. Notably, they share qualities much like Support and Resistance lines.



These lines can be divided into two main variations; up and downtrend lines. Uptrend lines are drawn by connecting various lows of an asset’s price on its graph, contrastingly, downtrend lines can be constructed by connecting the highs.



Their indication is akin to Support and Resistance lines. When prices in the price chart approach near the drawn trend line, they could potentially bounce off the projected trend line back to its original trajectory. In another case, after bypassing the line, it also has the chance of bouncing back, either ascending or descending depending on its previous price movement.



Moreover, trend lines can also be applied to continuously draft the price patterns on the desired graph.





Chart Patterns



Chart Patterns or Price Patterns are patterns of price graphs occurring abundantly in every asset's chart. The majority of chart patterns are drawn with two trend lines. If the price breaks out of the two lines, it is projected that the asset’s price would either increase or decrease drastically, depending on the situation at hand.



With the Chart pattern method attaining high capabilities of predicting the future trend, its usage has been applied in a widespread manner.





Candlesticks



Mastering the technique of understanding candlestick graphs could grant you a higher understanding of the potential projection of prices.



Candlestick graphs are commonly used as indications of market reversals, which can be the desired points of entry or exit for many investors. In detail, candlesticks identify points in which markets are bullish or uptrend to begin buying ahead of it, along with when markets are entering a bearish point, indicating they should prepare to sell their assets beforehand.





Market theories



As often appearing on online platforms, theories are also applied to technically analyze market graphs and their projections in a manner that provides supporting information behind specific movements. Examples of frequently used theories include the Elliott Wave, Fibonacci and Dow theories.





Pros



Techniques used in technical analyses take concerns of mathematical calculations to predict the upcoming movements and behavior of the market for the most suitable outcome of a trader, making them highly useful.



Therefore, because of this, prices’ behaviors are often found to be controlled by traders’ hopes and desires, often referred to as the Self-fulfilling prophecy, wherein a large number of traders in a market agree on a certain movement or pattern of a graph, after making their technical analyses. Afterward, with their trades and doings, the prices meet their projected demands.





Cons



Technical analysis methods can be less helpful in markets with lower volume and market capitalization, meaning that fewer activities are going on when compared to larger markets. On the other hand, these markets are often found to be more sensitive to other factors, such as news updates or influential traders. 



Furthermore, though technical analysis techniques can be highly accurate, they are never 100% correct. This means traders are always required to be conscious and aware of the risks they are taking, along with consistently utilizing numerous forms of techniques and tools as well, to provide adequate information before making investment decisions.





Reference:



MiTRADE, IG.com, BinanceAcademy, ELUforex, Investopedia, AdmiralMarkets, Finnomena

Terms

Latest Articles