What is technical analysis?

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 potential 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.

Customisable technical indicators :

If technical analysis frightens you with its apparent complexity, you can customize the graphs to visually display some of the most popular indicators. You can thus display several interesting indicators simultaneously and over the period of your choice. Among these technical indicators are :

• Pivotal points: These indicators are easily identifiable on the charts provided by the brokers and are actually levels at which the price is most likely to evolve by extending its trend or, on the contrary, by reversing it. Waiting to see a price at a pivot point gives a good indication of whether or not a trend is likely to continue.
• Levels of support and resistance: These levels are also interesting to identify. A support corresponds to a strong psychological threshold at the bottom. Thus, when the price of the asset exceeds this support downwards, it indicates a probable strengthening of the downtrend and when it resists, it announces a probable upward turnaround. As for the resistance, it is a single psychological upside. When it is crossed, we sometimes see a continuation of the upward trend and when it resists, a bearish reversal.

In addition to your own technical analysis, it is also possible to access signals from this analysis offered by certain trading platforms. It is advisable here to evaluate the risk of these signals by means of the associated confidence index and to understand that none of these forecasts are 100% reliable.

At the same time, remember to use fundamental analysis to develop comprehensive strategies that take into account all influencing factors.