Technical Analysis is the identification of trends in order to better predict the future fluctuations of a financial asset.
Technical Analysis is crucial in all kinds of financial trading, especially in CFD and Forex Trading due to their volatility. Analysis allows a level of insight into the behaviour of assets depending on the state of the market at any given moment and allows traders to make decisions based on reliable mathematical evidence. As a result, traders are able to predict future market movements with a higher degree of certainty and make the optimal trades accordingly.
How does it work?
Using graphic tools, algorithms, market indicators and reports, Technical Analysis uses patterns in market behaviour to better predict future trends. To do this, analysts must use three assumptions.
- Price reflects overall stability.
High prices mean demand for an asset is high and low prices mean demand is lower than supply. There are other factors at work here, but it mainly comes down to supply and demand.
- Prices move in trends.
This just means values either go up, or they come down. As analysis is based in mathematics, we must assume that prices aren’t suddenly going to move sideways.
- History repeats itself.
If something happens once, under the same circumstances, it is likely to happen again.
Technical Analysis is uniform. It is and must be performed in the same way on any given asset or outcomes will vary.
How to use Technical Indicators.
Technical Indicators are mathematical tools that allow us to compare assets. They take into account a number of variables which are handled in such a way that assets can be compared numerically. It’s all very well being able to say, for example, that two assets are volatile, but from this statement how can we determine which is the preferable investment? Technical Indicators give us the power to compare assets in more depth and with considerable ease, than if we were to consider each variable independently.
Indicators are classified into four groups. These are:
- Trend Indicators.
These allow us to see, in real time, what assets are doing. Whether prices are moving up or down.
- Momentum Indicators.
These look at that movement in more depth, they show us the strength in which prices are moving.
- Support and Resistance Indicators.
These are indicative of a kind of buffer zone, when prices rarely go above and rarely drop below certain point.
- Volatility Indicators.
These attempt to show the expected movement within a market over a certain time period. A high volatility indicator shows high levels of price fluctuation.
Technical Analysis helps traders make more accurate predictions and minimise potential risk. It is hugely important to get familiar with the tools and indicators associated with this.