The technical analysis (TA) is closely linked to the price chart. Even a beginner focuses on getting acquainted with a trading platform and searching for the regularities. And we should mention that they always find them. A graph is a kind of universal language.
Analysts and traders all around the world have developed their own language that allows them to “read” trading signals and take appropriate measures according to their trading strategy.
Technical analysis – is a set of tools for predicting probable price changes based on the price patterns that occurred in the past in similar circumstances.
Such measures are an attempt to predict market tendencies for gaining profit. It is based on the processing of the previous price patterns and market conditions.
To make it possible traders use formulas, algorithms, and indicators. In other words, objects that somehow interpret the quotes chart. In such a way it helps to turn a chaotic set of prices into a logical structure.
TA answers the main question for any trader – is it worth buying, selling or not making transactions with the selected asset now. This strategy is popular among both speculators and investors. A speculator can rely entirely on the TA. In this case, the investors make a decision to purchase an asset due to TA. It helps them buy an asset at a better price (to sell it later and gain profit).
The postulates of TA
- The market price includes all aspects: according to the axiom, all the facts and information necessary to make a well-informed decision can be found in the price chart and trading volumes. The price reacts almost immediately to all events that can affect it.
- Price movement depends on the trends: the market always has some particular trends that last a limited period of time. It can be growing or fall, depending on the correlation of supply and demand for the asset. If there is a trend, there may be periods of correction (opposite price movement). Any trend can end at any time.
- History repeats itself: if in the past the price has changed in a certain way in certain conditions, then there is a reason to believe that in the future in the same situation the price will react in a similar way.
Technical analysis tools
Since TA is so crucial for traders, there are special trading tools that make this process much easier and more effective. They assist in evaluating the trading data and taking appropriate decisions.
By applying to TA tools people engaged in trading can separate their emotions from indisputable facts. The vast majority of them provide not only high-quality analytical analysis but also guidance for new traders. What’s more, some technical analysis tools are available for free. Thanks to such trading platforms traders receive signals to buy or sell and detect the market patterns or trends.
- On Balance Volume
On Balance Volume is a popular indicator based on trading volume in a security. This indicator doesn’t have a model averaging tool. Therefore, it is synchronous with the price. OBV is one of the simplest and at the same time the most effective indicators.
This indicator was introduced by Joseph Granville in his book The New Stock Market Strategy in 1963 but remains relevant even today. As the author said, the volume is the steam that makes the locomotive go.
It is believed that if the closing price exceeds the previous one, then the volume of the candle is added to the value of the On Balance Volume indicator. If the current closing price is lower than the previous one, then the volume data is subtracted from the indicator. If the current price coincides with the previous one, the On Balance Volume indicator doesn’t change.
Average Directional Index
The Average Directional Index (ADX) is an index that shows the presence or absence of a trend. It gives people insight into the driving forces that are dominating the market price at a particular moment. In other words, ADX shows you the tendency of the current trends.
Trading with the ADX indicator includes the following signals: If the ADX remains below the 20 point, it is a sign that the trend is missing or weak. If the ADX moves above the 20 point, it is a sign that the trend is strong. If ADX passes level 40, this is a sign that the trend has reached its highest point. If the ADX value is growing, the trend strengthens; if it is falling, the trend becomes weaker.
The Aroon indicator is a great option for both beginners and experienced traders. It allows users to point out local price lows and highs. In such a way it helps to determine the optimal moments for entering the market.
This indicator was specially created to determine the emerging Forex tendencies in advance, as well as the direction of the price chart. The basic principle of this tool is to detect mainstream changes.
Relative Strength Index
The Relative Strength Index (RSI) is one of the most pivotal and famous tools among traders all around the world. This indicator is an oscillator. It means that it fluctuates in a certain zone, limited by the maximum (100) and minimum values (0).
This tool displays “momentum” – the speed and amplitude with which the price tendency changes. In other words, the RSI indicator shows the strength of the trend and the likelihood of its change.
If you want to trade successfully, technical analysis is something you should master. Only this approach increases the likelihood of making well-informed decisions for gaining profit. Otherwise, it doesn’t have any sense.
You should understand that we have mentioned only a small part of the technical analysis tools that are used by analysts. There are numerous options for you to choose from. Anyway, this article gives insight into the technical analysis, its postulates, and some of the tools. This information is of pivotal importance if you want to become a successful trader!