Technical analysis – an approach used to predict price movement in the future analyzing statistics gathered from trading activity in the past
Technical analysis focuses on three statements
Price movement considers everything
All information that affects the price, already lies in it, so there is no need to analyze certain factors that influence the price. Thus, it's important to concentrate on price dynamics for making technical analysis.
Price movement follows trends
Market is managed by psychology and always follows this or that trend. There are three types of trends: — Uptrend (bullish) - price is moving upward. — Downtrend (bearish) - price is moving downward. — Horizontal trend - price stays on the same level with slight movements upward and downward.
Market participants have common psychology and behavior in the same situations, so price has cyclic nature.
The main instrument of classical technical analysis is a chart of price change for a certain period of time.
It's important to use only the main prices while making a chart: open and close prices, minimum and maximum prices for a period.
Groups of indicators
The most commonly used indicators are: Stochastic, Moving Average (MA), RSI, Bollinger Bands, MACD, Parabolic, Ichimoku
Identification of the trend and following it. The most common among such indicators are: Bollinger Bands, moving average, Momentum Indicator and ADX
Graphic indicators allow you immediately understand whether Forex, index and stocks are in a state of «overbought» or «oversold».
The group of technical indicators that calculates the data on the basis of the number of transactions per unit of time. It shows relative changes.
It is important to know
Technical analysis doesn't need large amount of statistical data and time for news study.
All is needed is managing main instruments of technical analysis for successful deals.
Types of charts
Candlestick analysis is widely used on the foreign exchange market as an additional signal to predict price movement and its turn
Reflects only the price of closing each period: minute, hour, day
Reflects open and close prices, minimum and maximum prices for a period
Is built similarly to bar chart, but distance between open and close prices is painted over depending on what is higher: open or close
It's important to know three main things to make right candlestick analysis
1. If a candlestick is painted over with black color, the price is going down and if it's painted in white, it's moving up.
2. The longer the body of a candlestick is and the shorter its shadow is, the more chances that the price will move in the chosen direction. The longer the shadow is and the shorter the body is, more likely the price will go in the direction opposite the long shadow.
3. If the price doesn't go in the expected direction, it's more likely to go in the opposite one.
Technical indicators are used for alternative chart analysis. As usual price is used for their calculation, rarely – volume
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