Become a master of the trading world. Know every market move and stay one step ahead. The arsenal of technical indicators is something you cannot ignore. This article will equip you with the most advanced tools to help you master technical analysis and achieve optimal profits on any trading platform.
What are Technical Analysis?
Technical Analysis are simply understood as compasses in the stock market. They are based on data obtained in the past such as prices, the number of shares traded, to predict what may happen in the future. Investors use these compasses to find the right time to buy or sell stocks.
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Principles of technical analysis
Technical analysis is based on the premise that history repeats itself. Analysts believe that by studying past price movements, they can identify repeating patterns that can help predict future market trends.
Technical analysis as a diary of market
The first and most important principle of technical analysis is: “The market knows everything”. That is, the current stock price has reflected all available information such as profits, assets, and emotional factors such as investor optimism or anxiety. Therefore, it is very difficult to accurately predict future stock prices.
Instead of trying to predict the future, technical analysts focus on studying price charts. Charts are like a diary that records all market developments. By analyzing charts, investors can recognize repeating patterns and make investment decisions based on what the market has done in the past.
Prices move in trends
Market prices tend to move in clear trends. Upward, downward, or sideways trends are formed by the interaction of supply and demand, along with crowd psychology. When many investors act in the same direction, the trend becomes stronger and harder to change. However, no trend lasts forever, and identifying a trend reversal point is one of the biggest challenges for investors.
History Repeats
Technical analysis is based on the idea that history tends to repeat itself. Prices tend to move in certain patterns, reflecting the general psychology of investors. When the market gets too hot or too cold, technical analysts look for good entry points by comparing the current situation with similar situations in the past. They believe that by understanding the repetitive behavior of the market, they can predict future price movements.
Types of Technical Analysis
Some common indicators that are indispensable in analysis, include:
Trend Indicators
Trend analysis means the act of predicting based on price charts how they will change over time. Just as a river can flow strongly or slowly, prices can also increase, decrease or move sideways.
Technical investors often look for these ‘flow directions’ of trends. To determine the trend, they will look at the price peaks and troughs. If the peaks and troughs are consistently higher, it is an uptrend. Conversely, if the peaks and troughs are consistently lower, it is a downtrend.
However, trends are not as simple as that. A major trend can include many smaller trends within it. For example, within a major uptrend, there may be temporary periods of price decline.
Investors use a variety of tools to identify and track trends, such as:
- Trendlines: These are straight lines connecting peaks or troughs to determine the direction of the trend.
- Support and resistance levels: These are price levels where prices often stop or reverse.
- Fibonacci Levels: These are price levels calculated based on the golden ratio, which help predict potential stopping points of the price.
- Japanese Candlesticks: These are small charts that show price movements over a certain period of time.
By understanding trends, investors can make better buying and selling decisions and increase their chances of success.
Momentum Indicators
Momentum measures the strength of a price trend. When prices rise rapidly, momentum is strong. Conversely, when prices fall rapidly, momentum is weak.
- RSI (Relative Strength Index):
- A popular indicator for measuring momentum.
- Displays a value from 0 to 100.
- When RSI is above 70, the stock may be overbought.
- When RSI is below 30, the stock may be oversold.
- How to use RSI:
- When RSI moves from oversold to above 30, it may be a buy signal. Conversely, when RSI moves from overbought to below 70, it may be a sell signal.
- Combine with other indicators: Use RSI with other Technical Analysis such as moving averages to confirm signals.
- Volatility Indicators:
Think of the stock market as a roller coaster. When the roller coaster is going fast and up and down, the market is very volatile. Volatility indicators like Bollinger Bands or ATR help us measure how “excited” the market is.
Popular volatility indicators
- Bollinger Bands: Like a thermometer, they tell us if the market is hot or cold.
- ATR: Measures the average volatility over a given period of time.
- VIX: Measures the expectation of future market volatility.
Understanding volatility is important for assessing risk, choosing the right strategy, and making better trading decisions.
Fundamental vs. Technical Analysis: What’s the Difference?
Unlike technical analysis which is based on data from the past, fundamental analysis is based on current data which is the real value of a company. Simply put, it is like you go to see a house before deciding to buy. You will consider many factors such as area, location, and condition of the house to evaluate whether the house is worth the money you spend or not.
Let’s learn more about the differences between these two types of analysis.
Distinguish between fundamental analysis and technical analysis:
| Features | Fundamental Analysis | Technical Analysis |
| Goals | Assessing the intrinsic value of the company | Predicting near-term price movements |
|
Data |
Financial statements, economic situation | Price charts, trading volume |
| Timeframe | Long-term | Short-term and medium-term |
| Tools | Balance sheet, income statement | Candlestick charts, technical indicators |
How do I start learning technical analysis?
Based on the Technical Analysis mentioned above, you can learn how to create a trading plan for yourself step by step as follows: First, you should determine the market trend based on the price fluctuations that are taking place. Then, analyze the trading volume that takes place at different times in the market. Finally, you can create a potential chart model for yourself and consider adjusting it to suit your personal circumstances.
Conclusion
In conclusion, through the above information, you can clearly understand how important Technical Analysis are and its importance in contributing to the success of investment transactions. Do not forget to update your knowledge every day because the market is infinitely changing and unpredictable, so we need to equip ourselves with appropriate analysis and response strategies.
