What is Technical Analysis?
Technical Analysis is a method of forecasting future trends in financial markets. It is based on analysis of historical data, including prices, trading volumes and open interest.
Technical analysts and traders use technical indicators and mathematics to make their investment decisions. These indicators are displayed in real-time graphics that are interpreted to identify buying and selling opportunities.
Principles of the Dow Theory
The theory of Charles Dow, the founder of the Wall Street Journal, is the basis of modern technical analysis. It is based on three fundamental principles :
1. The price of a financial asset reflects all the effect of market forces. At every moment, the price incorporates all factors that influence the markets (information, fundamentals, the operator’s psychology …).
2. Market prices follow trends that can be identified and transformed into an earning opportunity.
3. The price evolution graph figures historically repeat.
• The advantages of Technical Analysis
It requires less data than Fundamental Analysis. With a price and volume history, a technical analyst has all the information required.
As it is concerned with identifying trend reversals points, it allows the trader to better manage their movement timings, unlike Fundamental Analysis.
• Limitations of Technical Analysis
Technical analysis can become self-fulfilling. When many investors, who use the same tools for Technical Analysis and follow the same concepts, act together on supply and demand of a financial asset, this can cause prices to move in the anticipated direction.
Technical Analysis and (or) Fundamental Analysis
Technical Analysis is today one of the best methods to study and anticipate the behaviour of financial markets. It has proved be extremely valuable for investors and its practice is growing rapidly with market operators. Used in addition to Fundamental Analysis, Technical Analysis allows the Trader to determine the diagnostic of the market precisely, and can contribute more effectively to its trading success.
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