on the Forex market
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acquaintance with the foreign exchange market
Today we will give a quick overview of technical analysis. There are three rules that form the basis of technical analysis. First, the price takes into account everything. Second, prices are trending. Finally, history repeats itself.
In this lesson you will learn:
What is technical analysis;
How to analyze the market using price charts;
Why history tends to repeat itself in financial markets.
There are two approaches to market access that traders use to determine: will the market go up or down? These approaches are known as fundamental and technical analysis.
The application of such approaches can be seen in the example of buying a car. You can analyze a car in terms of price, and on the other hand, you can assess its technical condition: engine, chassis, etc.
Fundamental analysis focuses on economic information about a company, product, or currency. Technical analysis focuses on charting to predict potential price movements.
Technical analysis is one of the most popular methods today that traders use to identify trading opportunities.
There are three principles of technical analysis:
- the price takes into account everything;
- prices move in trends;
- history repeats itself.
Price takes into account everything
Technical analysis only considers price movement, ignoring fundamental factors. It is assumed that all the factors influencing the market price are contained in these movements. All that needs to be studied is price behavior.
Of course, an unexpected event can happen that can have an impact on the market, for example, a natural disaster or geopolitical tensions. But the technical analyst is not interested in its cause, he focuses on the chart itself, as well as on the forms, patterns and formations that appear on the chart.
Prices move in trends
In technical analysis, it is generally accepted that there is always a general trend in the market. It may be an upward trend when the asset is more likely to rise. There is also a downward trend, in which case the price is more likely to fall. The third option, when the price arrives in a range, is called Flat.
By identifying the general trend in the market, you can determine which trades are worth opening. For example, the quote USD / RUB (US dollar to ruble). Of course, the dollar does not always rise in price against the ruble, there are times when it falls. But, looking back, we can conclude that from month to month, from year to year, the dollar becomes more expensive against the ruble. This is an upward trend. Accordingly, buy deals on the USD / RUB pair are more likely to bring profit than dollar sales.
History repeats itself
The behavior of prices in the market is associated with certain patterns: it is not chaotic, and therefore predictable. People determine the price: traders start buying an asset, therefore, the price rises. If the asset is sold, then the price falls. People tend to act in the same situations in the same way, if it has already brought a positive result.
Thus, technical analysts use historical price data to predict where prices are likely to go next.
Let's look at an example. Suppose that USD / RUB rises to 85 rubles again, then the probability of a fall of the US dollar against the ruble is high, since 85 rubles per dollar is historically the highest price. Traders, focusing on this data, for the most part will open sell, not buy deals, which will lead to a fall in prices.
This is where support and resistance levels appear. Graphs tend to take on forms that have taken place before. Analysis of past patterns helps technical analysts predict future market movements. These forms are known as price patterns.
Technical analysis is based on analyzing price charts and identifying patterns, that is, situations that have already occurred before and developed in the same way.
There are many different methods for identifying trends. But the results of technical analysis, like weather forecasting, do not cover all scenarios. Instead, technical analysis helps investors anticipate what might happen to prices over time.