Should I buy today? What will prices be tomorrow, next week, or next year?
Wouldn't investing be easy if we knew the answers to these seemingly simple
questions?
The term "technical analysis" is a complicated sounding name for a very basic
approach to investe. Simply put with charts being the primary tool, the technical analysis is the study of prices.
The roots of modern-day technical analysis stem from the Dow Theory,
developed around 1900 by Charles Dow. Stemming either directly or indirectly
from the Dow Theory, these roots include such principles as trending nature
of prices, prices discounting all known information, confirmation and divergence,
volume mirroring changes in price, and support/resistance. And of course, the
widely followed Dow Jones Industrial Average is a direct offspring of the Dow
Theory.
Charles Dow's contribution to the modern-day technical analysis cannot be
understated. Its focus on the basics of security price movement gave rise to a
completely new method of analyzing the markets.
Basics of technical analysis
- Price includes all.
The security price represents a consensus. It is the price on which, the one
person agrees to buy and another agrees to sell. The price on which an investor is
willing to buy or sell depends primarily on his expectations. If he expects the
security's price to rise, he will buy it; if the investor expects the price to fall, he will
sell it. These simple statements are the cause of a major challenge in forecasting
security prices, because they refer to human expectations. As we all know
firsthand, humans are not easily quantifiable nor predictable. This fact alone will
keep any mechanical trading system from working consistently.
- Price does not move randomly, and what the direction to trends is
as we had not resisted, but the market managed psychology. The fear of losing makes us sell in a falling market, and greed - to buy the growing. Often, we do not even realize that their own actions support the current direction of the trend.
- History Repeats
History Repeats
If prices are based on investor expectations, then knowing what a security should sell for (i.e., fundamental analysis) it becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is important. But, there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove.
"I believe the future is only the past again, entered through another gate."
---Sir Arthur Wing Pinero, 1893
Technical analysis is the process of analyzing a security's historical prices in an effort to determine probable future prices. This is done by comparing current price action (i.e., current expectations) with comparable historical price action to predict a reasonable outcome. The devout technician might define this process as the fact that history repeats itself while others would suffice to say that we should learn from the past.
So....
What is technical analysis?
Technical analysis is based on experience, market research, analysis of charts and looking out for historical price movements.
To trade with technical analysis:
- you do not care to know the fundementals
- you do not need to understand the economic performance of different countries and their impact on markets
- you just have to possess the tools of technical analysis , which is less compared to the tools of fundamental analysis
- you do not need to spend a lot of time learning the news of the economy and politics
New technical analysis Masterforex-V
Now, the classic technical analysis has an increasing number of participants. There is a vast amount of literature on this topic including such well-known authors as Schwager, Murphy, Neumann and others.
Unfortunately, in these books, it is very hard to find something new. In fact, after reading a book, you'll learn everything that they write. New research is mainly carried out in search of "miracle-indicators."
In a completely different way has been developing the Masterforex-V World Academy:
Trading System at Masterforex-V, gives you the opportunity to learn from experience trader in field of technical analysis, and takes you to a new world of trading.
Advantages of the new technical analysis of the Masterforex-V
Technical analysis Masterforex- V allows you to :
- clear understande the technical analysis tools (eg. trend and reversal patterns);
- significantly reduce the number of instruments of technical analysis (eg. Masterforex-V Trading one figure fractal-zigzag reversal, replaces five major reversal patterns of classical technical analysis);
- use technical analysis not only to predict the markets, but also to make specific trade decisions .
And a lot more, but first things first.
Read more:
- TREND IS YOUR FRIEND
- The trend line
- Support and resistance levels
- trend-turning figure
If you are familiar with these concepts - move to the next class: Elliott Wave Theory
Should I buy today? What will prices be tomorrow, next week, or next year?
