The Power of Technical Analysis

You can use technical analysis to assist you in predicting future price movements by studying the historical data records of an asset, i.e. stock, commodity, currency pair or index. By doing so, you will be attempting to obtain a full picture of the trading history of the asset. You will discover that, even those individuals, who prefer to base their trading styles on fundamental analysis, will still utilize technical analysis as a verification method.

When using this type of study, you need to understand that it is based on a number of key theoretical ideas. For instance, technical analysis tracks price movement and its related data and certainly does not involve the opinions or attitudes of traders in any way whatsoever. This analysis is also structured on the fact that history has a strong tendency to repeat itself by producing price patterns that possess predictable characteristics.

As such, your main objective when applying technical analysis is to identify new quality trading opportunities which you can attempt to do by studying these predictable patterns. As many experts consider that the price actions of most assets move in trends, they do not think that the resultant oscillations are just chaotic in nature without any order. For instance, if they detect that price has been moving in a certain direction for some extended time then they normally assume that it will continue to do so unless a major event or stimulus intervenes.

You will find that if you incorporate technical analysis into your trading strategy, it will help you trade in a more scientific and business-like manner. Although this type of analysis is by no means flawless, it can assist you in making better objective and quality trading decisions. In particular, you should pay close attention to the trading maxim that states that ‘trends are your friends” as well as appreciating that major shifts in trading sentiment predict and predate trend changes. This means that you will discover that price movements are frequently driven by investors’ emotional responses which then generate recognizable price chart patterns.

Technical analysis focuses on the study and interpretation of trading charts in order to identify new trading positions that possess optimum profit potential with minimum risks. Fundamentally, the quality of the statistics associated with price movements increases as the time-frame gets longer. This is especially so during less volatile times when price is following well defined patterns. This is why the hourly and daily timeframes are so popular. However, longer time frames have the disadvantage of not responding quickly to rapid price reversals and spikes.

One of your prime objectives when you start trading is to develop a technique that will supply you with reliable signals which are capable of identifying new quality trading opportunities. Many traders use technical analysis to fulfill this function and, in particular, utilize one or more of the many technical indicators that are available to identify entry and exit points. You will discover that there are a large number of such tools accessible by performing a suitable internet search.

Technical indicators can help you detect new trading prospects as well as assisting you in analyzing trading charts. Some of the more popular indicators are the MACD, Moving Averages, Bollinger Bands, Stochastic and RSI although there are many more. Please note, however, that as not one of them can guarantee success just on its own, you will need to fully integrate your favorites into your trading strategies in order to optimize their performances and maximize your profit potential.

During volatile times, the effectiveness of technical analysis is reduced substantially because of the significant increase in rapid price movements, such as spikes, and the creation of more complex and irregular trading patterns. A prime example of such a condition is the release of very important economic data. Technical analysis simply cannot cope very well with these events because the statistical techniques that it depends on become ineffective by the sheer volatility that can be produced at these times. As such, experts strongly advise not to try and identify major price formations during these occasions but instead wait until the volatility diminishes after which improved and more reliable statistics will prevail.

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