Technical Analysis Explained?
Technical analysis is the study of market action primarily through the use of charts for the purpose of forecasting future price trends.
Technical analysis strategy is a crucial method of evaluating assets based on the analysis and statistics of past market actions, such as past prices.
In trading, technical analysis is an analysis methodology for forecasting the direction of prices through the study of past market data, primarily price. Behavioral economics and quantitative analysis use many of the same tools of technical analysis, which, being an aspect of active management, stands in contradiction to much of modern portfolio theory. The efficacy of both technical and fundamental analysis is disputed by the efficient-market hypothesis, which states that market prices are essentially unpredictable, and research on technical analysis has produced mixed results.
The main goal of technical analysts is not the measuring of asset’s underlying value, they attempt to use charts or other tools of technical analysis to determine patterns that will help to forecast future market activity. Their firm belief is that the future performance of markets can be indicated by the historical performance.
Technical analysis can be used on any security with historical trading data. This includes stocks, futures, commodities, fixed-income, currencies, and other securities.
Professional analysts often use technical analysis in conjunction with other forms of research.
Technical analysis believes that history tends to repeat itself.
Retail traders may make decisions based solely on the price charts of a market.
The repetitive nature of price movements is often attributed to market psychology, which tends to be very predictable based on emotions like fear or excitement. Technical analysis uses chart patterns to analyse these emotions and subsequent market movements to understand trends. While many forms of technical analysis have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.
Across the industry there are hundreds of patterns and signals that have been developed by researchers to support technical analysis trading.
Technical analysts have also developed numerous types of trading systems to help them forecast and trade on price movements. Some indicators are focused primarily on identifying the current market trend, including support and resistance areas, while others are focused on determining the strength of a trend and the likelihood of its continuation.
Analysing price charts includes identifying short-, medium- and long-term trends, pinpointing areas where consolidation shows that supply and demand have been evenly balanced in the past and calculating price targets.
One of the many attractions of technical analysis is that its methodology can be applied almost identically in any market anywhere.
Technical analysis is therefore critical in deciding when it is desirable to buy or sell, even if they may have been identified as attractive or dangerous in terms of fundamental value.
The same techniques can be applied to currencies, commodities, bonds, interest rates and equities. They work as well in Japan as in Europe, in developed or developing markets.
Many investors leverage both fundamental and technical analysis when making trading decisions since technical analysis helps fill in the gaps of knowledge. By developing an understanding of technical analysis, traders and investors can improve their long-term risk-adjusted returns, but it’s important to understand and practice these techniques before committing real capital to avoid costly mistakes.
Learn To Trade Our Strategy
Our Strategy focuses on supply and demand, market sentiment, momentum and Stop Hunting ( Order Traps and Fakeouts)
Supply And Demand Trading
As supply and demand traders, we do not need to pay attention to the news, fundamentals or any earnings reports. Why is it that you see positive News and then the underlying market drops like a rock, or a negative news announcement and the market rallies? You are probably missing the fact that there big institutions are trying to make money!
Unless you are doing very short term trading and scalping, you should not worry about fundamentals or earnings announcements.
You can use these imbalances to plan your trades in lower timeframes. Trading is just waiting for the right trigger points and scenarios to present themselves. We need to patiently wait for the correct scenarios and setups to happen and wait for the price to react from our levels and we can take advantage from these moves!
If you want to learn how to trade using our trading strategy, join our Price Action Trading Course.
What are Fakeouts (Order Traps, Stop Hunting)?
First things first, before you can learn our strategy you have to understand how to use order traps to your advantage, you have to know what they are and how to identify them.
Order Trap ( Stop Hunting, Fakeouts ) are terms used in technical analysis to refer to a situation in which a trader enters into a position in anticipation of a future transaction signal or price movement, but the signal or movement never develops and the asset moves in the opposite direction.
Order Traps are when a trader puts on a position expecting it to move in a direction and it fails to do so.
Stop Hunting happen when many traders plan their exit by offsetting orders to make sure their potential losses are limited
Stop Hunting can cause considerable losses for a technical analyst. These traders will typically rely on well tested patterns, multiple affirmations of an indicator and specific allowances to protect from significant losses. Sometimes the setup can look perfect, but outside factors can cause a signal to not develop as planned.
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