Technical analysis methods, which are used for all kinds of financial assets with historical price information such as stocks, cryptocurrencies, or commodities, are used to predict the direction in which the markets will move in the future by looking at the historical price information of these assets. Technical analysis, which is also frequently used in cryptocurrency trading, helps to evaluate trading opportunities. To explain technical analysis in more detail;
Technical Analysis (TA) is a method of analysis that helps predict the future direction of prices using price charts.
Technical analysis has developed and become popular throughout history. One of the first fundamental studies is the method known as the Dow Theory. Developed by Charles Dow, the Dow Theory uses indices of stock prices to determine the general trends of stock markets.
The main idea of technical analysis is that the market price moves up or down depending on external factors. External factors include political events, natural disasters, psychological concepts, and many others. The influence of external factors affecting technical analysis is immediately evident in the upward and downward price movement.
An important tool used in technical analysis is charts. Using different chart types, you can analyze price movements and identify trends, support, and resistance levels and other important indicators. Charts can be represented in different formats, such as line charts, bar charts, and candlestick charts.
Some other tools and indicators used in technical analysis include moving averages, RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence), Bollinger Bands, and stochastic oscillators. These tools are used to assess trends, momentum, overbought and oversold conditions in price movements.
Technical analysis tools are used to study how the supply and demand for financial assets will affect changes in price, volume, and volatility. It acts on the assumption that past trading activity and price changes of a financial asset, when matched with appropriate investment or trading rules, can be valuable indicators of future price movements of the financial asset.
Technical analysis can provide investors with information about the direction of price movements, identify trends, and help them identify entry and exit points. However, when used alone, technical analysis can ignore other factors and may not always make accurate predictions. Therefore, many investors combine technical analysis with fundamental analysis to make more informed investment decisions.
Technical analysis has a long history in financial markets and is still a widely used method of analysis today.
What Are the Basic Assumptions of Technical Analysis?
Technical analysis is based on three assumptions:
- Everything is discounted in the market
- Prices move according to trends
- Trends repeat themselves
Everything Is Discounted in the Market
It states that everything including external factors such as political events, natural disasters, psychological concepts, etc. have an impact on whether people participate in the trading market or not. In other words, prices are determined by evaluating all the information and factors of the market. Investors take into account all the information in the market, such as economic data, company reports and other factors, and use this information to make investment decisions.
For instance, a positive news announcement or a positive financial report of a company can increase investor demand for that company's shares and push share prices higher. Similarly, an unfavorable event or economic data can cause investors to withdraw from the market and drive prices down.
Prices Move According to Trends
It is based on the idea that prices are moving in a certain direction and that this movement will continue. For instance, if prices have been moving in an uptrend for a certain period of time, this trend is expected to continue and prices will continue to rise. Similarly, if prices are moving in a downtrend, they will continue to fall. In other words, technical analysts think that prices will show patterns even in non-uniform market movements.
Trends Repeat Themselves
Events and trends that have occurred in the past can be repeated in similar ways in the future. In the financial markets, past price movements are thought to be repeatable under similar conditions. That is, a given trend may reappear under similar conditions, and investors can use these repeated movements trying to predict future price movements.
How Does Technical Analysis Work?
The basic assumption of technical analysis is that fluctuations in the price of a financial asset do not occur randomly and usually form identifiable trends over time. Technical analysis considers the price of asset as a reflection of opposing buying and selling forces. These buying and selling forces are linked to the emotions of the traders.
Technical analysis focuses on past market performance. Assumptions are made by determining the changes in price, volume and other parameters of cryptocurrencies, support, and resistance points. Based on the assumptions, it predicts how the asset will move on the future and investors invest accordingly.
Various charts, called indicators, are used by traders to analyze prices and evaluate opportunities.
What Are the Technical Analysis Indicators?
There are a lot of models and signals developed by analysts to support the technical analysis trading processes. Technical analysts have also developed numerous trading systems to help them predict price movements and execute trades.
Some indicators focus primarily on identifying the current market trend, including areas of support and resistance. Other indicators focus on determining the strength of a trend and the likelihood of it continuing. Commonly used technical indicators and chart patterns include trend lines, channels, moving averages, and momentum indicators.
In general, technical analysts looks these types of indicator:
- Price trends
- Chart patterns
- Volume and momentum indicators
- Oscillators
- Moving averages
- Support and resistance levels
What Are Support and Resistance?
Support and resistance are two of the main ideas of technical analysis. Support and resistance refer to the levels at which technical analysts predict that an asset will start to rise after a fall (support) or fall after a gain (resistance). The two levels are used to initiate trades as they indicate the direction of an asset's bounce. If the asset reaches the support level, a long position is taken. A short position is taken when the resistance level is reached.
What Are the Differences Between Technical Analysis and Fundamental Analysis?
Technical analysis and fundamental analysis are completely opposite. Both methods are used to research, analyze, and predict the future movement of stock prices. As with any investment strategy and philosophy, both have their proponents and opponents.
Fundamental analysis attempts to measure the true value of a stock and is the method used to evaluate securities in this way. Fundamental analysts look in detail at everything from general economic conditions to the financial condition or management of companies. Earnings, expenses, assets, and liabilities are the most important characteristics.
Technical analysis differs from fundamental analysis in that a stock price and volume are the only inputs. The basic assumption is that all known fundamentals are included in the price. Technical analysts do not strive or work to measure the true value of a security. Instead, technical analysts use charts to identify patterns and trends that indicate how a stock will move in the future.
