Technical Analysis is a method of estimating price movements by looking at historical data in the market. Price data is the type of data that most widely used in the analysis process. However, there are other types of data that you can use in the analysis process such as volume and open interest in futures contracts.
When using technical analysis methods, you have to always refer to basic theory, which methodologically has proven effective for a certain period of time. You have to find a trading system that is suitable. Then, you can look for other techniques that you can combine with existing trading methods.
According to Investopedia, technical analysis attempts to forecast the price movement of virtually any tradable instrument that is generally subject to forces of supply and demand, including currency pairs.
Almost all traders use technical analysis although the numbers are minimal. Even those who strongly refer to fundamental analysis will use or look at the price chart before making a transaction.
At a very basic level of theory, charts help traders determine the ideal level to enter the market before entering into a transaction. Charts provide a visual effect of historical data on price movements. Therefore, traders can look at charts and find out if they are buying at a reasonable price.
Technical Analysis Assumptions
Market fundamentals have been reflected in current market prices. Thus, market fundamentals and other factors such as differences of opinion, hopes, fears, and sentiments of market participants, need not be studied further.
The market moves in a predictable range or at least has a certain pattern. These patterns result from price movements which are also called signals. The purpose of technical analysis is to get the signals based on current market conditions by studying past signals.
Prices move in the form of trends. Technical analysts usually do not believe that price fluctuations move in unpredictable and random conditions. Prices can move in one of three directions, that is, down, or sideways.
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