Technical analysis

Technical analysis is one of the tools designed to be applied in the analysis of the stock or financial markets.

It is based on the study of the prices of financial instruments, and is usually represented by graphic analysis: prices, trends, geometric formations, candles, etc. Either in technical indicators built based on price, volume, or some statistical measure.

Its beginnings are as old as the development of the Dutch sailing trade and the rice trade in Japan.

It had a period of rediscovery at the beginning of the 20th century, with the development of the Dow Theory, and is currently the working base of trading departments.

Technical Analysis: Concept

Technical analysis is a tool designed to study any market value, stocks, indices, derivatives, commodities, etc. The objective of technical analysis is to predict the future evolution of the price of an asset based on the evolution of the price that said asset has had in the past.

The purpose of Technical Analysis is to predict price behavior to determine buy and sell signals, based on the psychology of the public and that most investors behave in a rational way.

Technical analysis, within the stock market analysis, is the study of the market, mainly through the use of charts, with the purpose of predicting future trends or evolution in the price of financial instruments. He does not seek to know the fundamental reasons for such movements, rather he wishes to interpret and predict them.

Technical analysis is usually divided into two: chartism or trend analysis through the graphic observation of price series and technical analysis itself, through indicators.

Both complement each other very well and are used in an integrated way as a single whole, the whole being called technical analysis.

Technical Analysis: Main Components

Technical indicators are tools based on statistics in order to determine the future behavior of the market. These are the four general categories of indicators:

  • Trend indicators: we find moving averages, directional movement index, the Ichimoku Kinko Hyo, the convergence / divergence of moving averages and the parabolic SAR.

  • Momentum indicators: we find the relative strength index, stochastic and the Williams% R.

  • Volatility indicators: we have the true average range indicator, the Bollinger bands and the standard deviation.

  • Volume indicators: we have indicators such as the money flow index, the accumulation / distribution line and the volume balance.

Technical Analysis: Principles

A series of principles that guide technical analysis are described below.

  • Technical analysis only studies the price of the asset (in addition to the volume traded). In markets like Forex, the study of volume is not so reliable, since there are many “Over the Counter” operations. It considers that all the fundamental information: financial statements, GDP of the country, inflation, money flows, among others, referring to that market is perfectly reflected in prices. Therefore, it discounts all the information and relies on the theory of market efficiency.

  • Technical analysis is designed to study liquid markets, in which no operator has dominant power over the others. For this reason, when technical analysis is used to analyze a market, it is essential to study the liquidity of that market and if there is a large investor who monopolizes most of the operations carried out. From this point of view, the search for patterns of behavior in the volumes traded can tell us if there is a large “player” that is moving the market.

  • The price moves in trends. The concept of trend is very important for the technical approach. The main objective of technical analysis is to identify a trend in its early stage, to establish buy-sell operations in the direction of that trend. In this sense, the Dow theory and its postulates take on special vitality.

  • Human psychology is predictable because its mass behavior is cyclical and responds in the same way to similar events throughout history.

Technical Analysis: Conclusions

Technical analysis is a useful tool in trading. In value investing investments they are a great complement to determine when to enter or exit a certain position.

In trading strategies, whoever uses technical analysis must necessarily apply a back testing, in order to test the results of their system.

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