Technical Analysis Essentials
- 08 June 2015
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Definitions
Technical analysis is widely known as the assessment of a financial asset on how that will act in the future. The three basic elements of this evaluative or estimative methodology are price, volume and time (through studies of past market data or backtesting procedure) and the aim is only one; forecasting future price action.
Another definition of technical analysis is that is a method of analyzing the crowd psychology through the dynamics of the price action & the volume of a financial market. In fact, that really means how emotions drive the financial markets and moving the prices into upwards, downwards and sideways trends.
Finally, a third clarification of technical analysis is that is a process which follows the basic economic theory of supply and demand, in an attempt to determine next market direction. This system uses a wide range of scientific tools resulting from behavioral economics, quantitative analysis, physics and psychology.
Principles
All technicians agree to the three following principles:
a. Markets discount everything
Any relevant information regarding a financial instrument is already reflected by prices, including market psychology and fundamental factors too
b. Prices moving into trends
A financial asset’s price can only move into three different ways; uptrend, downtrend, or sideways (horizontal movement). There is no other possible price action direction in the financial markets. In any other case, a free organized market is nonexistent. So, technicians concern to find the appropriate time of entering a market by using signals and filters in order to predict the next market’s direction
c. History repeats itself
According to economics & technical analysis principles, price action is formed by traders’ and investors’ behavior and emotions and tending to repeat itself
