When we decide to invest money in the markets, whether it is the stock markets or the Forex, and whatever the financial instruments or products that we choose, it is essential to know how to analyse the markets to determine as precisely as possible the direction that the asset price will probably take and thereby implement effective trading strategies.
There are two type of analyses used by traders; technical and fundamental. In this article we will look closely at technical analysis of the markets and how advantageous it can be when investing online.
Technical analysis: What is it?
The term ‘technical analysis’ refers to a method aimed at predicting the future trends of assets in different financial markets. As the name indicates, technical analysis is only based on the technical aspect of things and therefore only charts and historical data available. Here it is particularly the price, the volumes traded and interest shown that are studied.
The traders that complete technical analyses generally do so by using mathematical indicators and statistics, as well as the most common chart indicators. They then use the conclusions to make decisions and open positions.
The most commonly used indicators for this type of analysis are expressed by charts in real time. It is therefore their interpretation that enables us to know how the asset price will react over a certain time period. It thereby also assists in obtaining buy or sell signals, leading to a rising or falling in the price, through the observation of trends.
What is the point of technical analysis?
Technical analysis serves to help you predict the coming trends on the Forex. By anticipating future movements of the rates you will be able to take a position to sell or buy a given currency pair.
However, the technical analysis will also indicate the volatility of a particular rate. This volatility should be taken into account when choosing the trading tool you will use. When you encounter a strong volatility, strong movements either up or down, it is better to trade the particular currency pair using the CFD in order to benefit from a short term profit. To the contrary, a relatively weak volatility is the sign of a clear trend which offers the security necessary for a more traditional style of trade.
How can I learn to accomplish a good technical analysis?
In order to familiarise yourself with the different analysis techniques we will study all the criteria and information to analyse in order to better understand the financial movements and their explanations. Amongst other things we will look at prices and volume, the different charts, trend lines and other performance indicators such as support and resistance levels and daily and weekly fluctuation channels for the different currencies rates.
All these indicators are necessary for a good understanding of the market and to master risk optimisation.
Once you have completely mastered these different factors of the Forex it will no longer hold any secrets from you and you will be able to trade with complete confidence.
Advantages and disadvantages of technical analysis:
Technical analysis offers above all the advantage of requiring just a little data to be used as it only calls for only the historical price charts.
By using precise points in the timeline and clearly defined levels, technical analysis enables increased precision and therefore prediction regarding the major entry times and points of entry and exit in the market.
But technical analysis also has its limits. In fact, one of the effects of technical analysis and its increasing use is to provoke a movement on the price of an asset through the combined analyses of numerous traders. This is what is called ‘anticipated direction’.
Furthermore, it is best to always use technical analysis as a complement to fundamental analysis.In fact, an unexpected event can contradict the conclusions of a technical analysis, even the most precise. This is because trading is basically an inexact science. It is therefore important to always keep an eye on events that could influence an asset price.
The technical indicators suitable for beginners:
If technical analysis makes you nervous due to its apparent complexity you should know that even beginner investors can easily use the charts to make predictions and take strategic positions. To do so you simply need to primarily study the simplest and most suitable indicators. Among these technical indicators can be found the following:
- The pivot points: These indicators are easy to identify on the charts provided by the brokers and are actually the levels at which the price has the greatest chance of moving in a continuation of the trend or, on the contrary, of reversing a trend. Wait to see the movements of a price at a pivot point to gain a good indication of the position to take.
- The support and resistance levels: These levels are also ideal for taking position. A support level corresponds to a strong low level psychological threshold. Therefore when an asset price falls below this level this indicates the strengthening of a falling trend and when it resists this announces a probable return to a rise. Concerning the resistance level, this relates to a rising psychological level. When it is crossed it often leads to a rising trend and when it resists this indicates a return to a falling trend.
It is also possible for beginners that do not wish to invest in technical analysis to access signals from this analysis offered for free by the trading platforms. By choosing the signals that have a higher reliability rating you can multiply your chances of making profits on the stock markets without having to dive into any technical analysis and charts.
Do not forget to use fundamental analysis as well to implement reliable strategies that take into account all the influential factors.