What is technical analysis?

Technical analysis is the prediction of future price movements based on past price surveys. Like weather forecasts, technical analysis is not completely accurate. Instead, Technical Analysis can help investors predict what is the possibility of price movements in the future. Technical analysis uses a variety of charts in relation to historical prices.



Technical analysis can apply to stocks, indices, commodities, futures, or other tradable instruments where prices are influenced by supply and demand pressures. Price refers to the link between high, low, opening, and closing prices of security through different time frames. The time frame can be in a day (from 1 minute, 5 minutes, 10 minutes, 15 minutes, 30 minutes to hourly ...), daily, weekly or monthly, annually. In addition, some technical analysts also use volume and interest rate index when studying price movements.

Fundamentals of technical analysis

When Dow theory was introduced late last century laid the foundations for modern technical analysis. The Dow Theory is not fully covered but has been assembled from many years ago by Charles Dow's writings. Among the many theorems given by Dow, three stand out:
  1. Discounted prices (for look) on everything
  2. Price movements are not random
  3. "What" is more important than ‘why’
Discounted prices (for look) on everything

This theory is similar to the strong market and the mean of the efficient market theory. The technical analyst believes that current prices reflect sufficient information. Because all information is reflected in the price, it forms a rationale for the analysis. After all, market prices reflect all expressions of market participants, including traders, investors, portfolio managers, price analysts, strategists, technical analysts, fundamental analysis, and many other components. Technical analysis uses information through prices to explain market stories and form a perspective on the future.

Price movements are not random


Most analysts agree that price tends to be, however, for the most part, they also know that there are times when the market is not trending if the price is always a random variable, it will be extremely difficult for traders. Monetization technical analysis.

A technical analyst believes that a trend can be identified, invested, or traded based on it. because the technical analysis can be applied to many different timeframes, both short and long term. The IBM chart illustrates Schwager's view on the nature of the trend. As the trend expands, we understand that it is a trading range. In the trading range, there are small uptrends in a larger uptrend overall. An uptrend will persist if the price breaks above the trading range. A downtrend is triggered when the price breaks out of the low of the previous trading range.

Price is the end result in a battle between supply and demand. The object of the analysis is the forecasting of future price trends. By focusing on price and price alone, the technical analyst finds the approach. Fundamental analysis is concerned with why the price is so volatile. With technical analysis, the reasons given by fundamental analysis have a certain delay. Technical analysts believe it's best to just focus on the price that's going on and don't understand why. Why are prices going up? Simply put, more buyers (demand) than sellers (supply). After all, the value of any asset is just what someone is willing to pay for it. Then need to know why for what?

General steps for technical analysis

Many technical analysts approach based on macroeconomic analysis. Others ignite the straightforward phase of microeconomic analysis. On the whole, technical analysts generally consider three steps:
  • Overall market analysis through key indices such as S&P 500, Dow Industrials, NASDAQ, and NYSE Composite.
  • Industry analysis to identify the strongest and weakest groups in the market.
  • Individual stock analysis to identify the strongest and weakest stocks in selected groups.
The beauty of technical analysis lies in its versatility. Because the principles of technical analysis are widely applicable, each of the above analysis steps can be performed using the same theory. You don't need to be too economically proficient to analyze a chart of market indicators. You don't need to be a CPA to analyze stock charts. The chart is the chart. It doesn't matter if the time frame is 2 days or 2 years. Doesn't matter a stock, market index, or commodity. Technical principles of support, resistance, trend, trading range, and other aspects can be applied to any chart. Although this seems easy, technical analysis is not easy. Success requires serious research, passion, and relaxed mentality.

Analyzing the chart

Technical analysis can be complex or simple depending on how you want it to be. When you want to buy a stock, focus on the bullish zone.


General Trends: the first step is to determine the General Trends. This can be accompanied by using a trendline, moving averages, or analysis of tops and bottoms. For example, an uptrend lasts and the chart looks like an upside, on trendline or moving averages.
  • Support: an area that, while the price falls to this zone, will bounce back several times at nearly equal prices. A break out of support would be seen as a bearish signal, detrimental to the overall trend.
  • Resistance: an area where, while the price goes up to this zone, it will go down again a few times at near equal prices. A break out of support will be viewed as a bullish and beneficial signal for the general trend.
  • Momentum: Momentum is usually measured by MACD. If the MACD is above the 9-day EMA of the MACD is positive, the momentum is seen as bullish, or at least for improvement.
  • Buy / Sell Pressure: For stock or index that has the volume to trade, an indicator uses volume smoke to measure buying and selling pressure. When Chaikin Money Flow drops below 0, buying pressure is confirmed. Selling pressure is confirmed when this indicator is higher than 0.
Strength correlation (RSI): RSI is formed by dividing security by a benchmark. For ordinary stocks, we divide the price by the S&P 500. The RSI tells us when the market is overbought or oversold.

The final step is to comply with the following:
  • The strength of the current trend
  • Predict when a trend will end
  • The position's profit and loss rate
  • Potential entry points
Vertical top-down technical analysis

For each area, an investor wants to analyze the long-term and short-term charts to find the characteristics that meet the standard of analysis. They will put the market first, perhaps most interested in the S&P 500. If the market is bullish, the analyst will proceed to select the industry chart. Industries that show the most promise will be selected for individual stock analysis. Once the industry list is narrowed down to 3-4 industry groups individual stock selection can begin. With a selection of 10-20 stock charts from each industry, you can choose from 3-4 stocks with the most potential. How many stocks or sectors are selected in the end will depend on the severity of the criteria set forth. Under this scenario, we will leave 9-12 stocks to choose from. These stocks can even be further subdivided to find 3-4 strongest stocks.

Strengths of technical analysis

Focus on price

The main goal is future price prediction, which means focusing on trends. Price movements often precede fundamental analysis. By focusing on price movements, technical analysts predict future prices. The market usually has one key indicator driving the economy for 6 to 9 months. To catch up with the market, it is necessary to consider direct price movements. Although the market is easy to react to sudden changes, technical clues often develop before major market fluctuations.
Supply, demand, and price movement

Many technical analysts use open, close, high, and low when analyzing price movements. These are information reflecting the supply and demand force is quite useful.


The annotated example above shows a stock with an opening price higher than the previous one. Before opening, the number of buy orders exceeded the number of sell orders and the price increased to attract more sellers. Buying demand was formed right before. The intraday high reflects the strength of demand (buyers). Intraday prices reflect supply (seller) availability. The closing price represents the final price agreed upon by the buyer and seller. In this case, the close is a lot slower than the low. This shows that although demand (buyers) remained strong for the day, supply (sellers) eventually prevailed and forced prices down. Even after selling pressure, the close remained above the opening. By looking at price movements over a long period of time, we can see a battle between supply and demand. Essentially, a higher price reflects an increased demand and a lower price reflects an increased supply.

Support and resistance

Simple chart analysis can help identify support and resistance levels. They are often marked by periods of trade congestion (range of trading), in which price moves in a narrow range over a long period of time telling us that supply and demand have reached a deadlock. When the price breaks out of the trading range it signals that either supply or demand has started to rise. If the price moves above the upper boundary of the trading range, the buyer wins. If the price moves down to the lower boundary of the range it tells us that the sellers are in command.

Historical prices

Even if you are a tried and true fundamental analyst, a chart of prices can provide a lot of valuable information. A price chart is an easy historical picture to understand over a period of time. Charts are much easier to read than a table of numbers. On most stock charts the volume bar is shown at the bottom. With this historical data, it is easy to identify the following:
  • Reaction before and after important events.
  • Movements in the past and present.
  • Historical transaction volume
  • The relative strength of a stock relative to the overall market.
Support finding entry points

Technical analysis can help determine the right timing. Some analysts use fundamental analysis to decide what to buy and Technical Analysis to decide when to buy. It's no secret that timing can play an important role in execution. Technical analysis can help identify demand (support) and supply (resistance) zones. Simply waiting for a break above resistance or buying near support levels can improve profits.

It is important to know the stock price history. If a stock you think has been great for the past two years has been trading sideways for two years, Wall Street seems different. If a stock has risen significantly, it might be wise to wait for a pullback. Or if the stock is in a downtrend, you may have to wait for buying power and the trend to reverse.

The weakness of technical analysis

Errors in the analysis

As with fundamental analysis, technical analysis is subjective and our personal opinions can be reflected in the analysis. It is important to be aware of these opinions when analyzing the chart. If the market analyst is bullish, then the uptrend will overshadow the analysis. On the other hand, if the analyst believes in a bearish market, then the analysis is likely to be bearish.

Comparative

Despite the standards, many times two technical analysts view the same chart, come up with two different scenarios. Both will be able to offer a plausible level of support and key resistance to justify their analysis. While this can be frustrating, it must be pointed out that technical analysis is more like art than science. Everything is relative, depending on the eyes of the viewer.

Too late

Technical analysis has been criticized for being too late. By the time this trend has been identified, the market has moved significantly. After such a big move, the profit: loss ratio is no longer large. Latency is a particular criticism of Dow's theory.

There is always another extreme

Even after a new trend has been identified there is always a different look. Even when they are optimistic there is always some indicator or to some extent that will affect the trading triangle.

Noise

Not all signals and technical models are working properly. When you start studying technical analysis you will come across a series of models and indicators with rules to incorporate. Example: A sell signal is given when the neckline of a head and shoulders pattern is broken. Although this is a rule it is not immutable and may be subject to other factors such as volume and momentum. Although many principles of technical analysis are universal, human lips choose their own path.

Conclude

Technical analysts say the market is 80% due to sentiment and 20% due to logical inference. Fundamental analysts say the opposite is true. Psychology or logic can open up endless debate, but there is no doubt about current prices. After all, price is something we all care about and no one doubts its legitimacy. The price is determined by the sum of the behavior of all participants. Participants looked at everything under their analysis for either buying or selling. These are the forces of supply and demand in the market. By monitoring price movements to determine which forces dominate, technical analysis focuses directly on the bottom line: What is the price? Where was it? Where is it going?

Although there are some universal principles and applicable rules, it should be remembered that technical analysis is more of an art than a science. As an art, it is explained. However, it is also necessary to be flexible in the approach and each investor should only use what suits his or her style. Developing a style takes time, effort, and passion, but the rewards can be substantial.

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