Introduction to Technical Analysis

[ForexArticles]

Technical analysis is the study price movements by using price charts in order to anticipate their movements. Technical Analysis includes a number of hypotheses and studies that correlate with each other through different time frames to form one harmonious theory. Technical Analysis analyzes the price movement in the market through the analysis of the three market factors: price, size of participation, and market sentiment, or in other words is the open interest (the number of open positions in a particular direction). Price is the main factor in the process of technical analysis, while the changes in the other factors taken into account in order to confirm the authenticity of the direction of prices. This theory, just like any other theory, has its basic hypotheses or assumptions.

Technical analysis of financial markets analysis makes it imperative for the merchant to consider the following hypotheses for granted

Factors effecting price movements are already incorporated in the price of a financial instrument

The most important rule of technical analysis; It is important to note that it is correct and to conduct a technical analysis of the process, we must be of regard to all effects, including, the price action itself. The essence of this is that any factor that may affect the financial market prices, whether economically, politically or psychologically, have already been taken into account in terms of the reflection of this factor on the price chart, this is because every change in the price is a change in external factors affecting theprice change. From this standpoint, the technical analyst price chart until follow-up technical analysis shows the process of price trend at the time of the economic impact, political or psychological.

This hypothesis is in fact run counter to the theory of analysis or fundamental news, the latter are primarily interested in studying the factors, then aim, and after analysis of the factors, to develop conclusions on market trends. Thus, if the demand is higher than supply, news analyst will be up to the conclusion that prices will rise in the future. Technical analyst, on the other hand, to reach this conclusion in the opposite sequence: As prices rose, it means that the demand is higher than supply.

Prices move with the general trend

This assumption is the basis for all methods of technical analysis, because the prices of technical analysis which is based upon the analysis of movement within the trend. Technical analysis assumes that the price movement in a particular direction is the result of a trend. The first will lead to the continuity of the price moves in the same direction and it probably will not reverse, and the second will lead to that current trend that will continue until the opposite direction imposes itself at the appropriate time (saturation of the market), leading to a trend reversal.

History repeats itself

Technical analysis and market dynamics associated studies closely linked with human psychology studies.From this logic, the technical analyst can identify price-fixing schemes as well as price activity models based on imaging the basic properties of the psychological state of the market in the past. The main reasons for the effectiveness of these models they clearly show the prevailing mood in the market, whether was in bullish or bearish. And since these models reflected the same conditions in the past, and led often to the same conclusion, then your have enough reasons to assume that the same conditions will lead to the same result using the same model in the future, and that they are based on human psychology which remains almost the same over the years. We can rework “history repeats itself” phrase – to become: the key to understanding the future lies in the study of the past.