As you could observe in the previous lessons, the
trade at financial markets intends the ability to predict the movement of the
price, determine the possibility of trends changing, monitor the current
situation and emerging changes which can influence the reversal of the further
events.
Different methods of analysis were created during the trade development
at financial markets helping to predict the market successfully, which means to
have profitable trading. Since this lesson we begin to study these methods
and the first of them will be Technical analysis.
Before we started to learn the methods and means
used for the technical analysis of the currency, commodity and other markets it is
necessary, first of all, to determine where the technical analysis started from
and what it really represents.
In the middle of the 19th century a the rapid development of organized market — places began, where the trading
participants make deals with various material and intangible values by the
uniform rules.
A differential peculiarity of such markets is that a trading
participant is not interested in who is the deal counterpart in 99% of cases
but its main characteristics are the price and the volume. The exchange is a
classic organized market.
This trading organizational chart sharply increases
the possibilities of participants to make deals — so-called market liquidity. Therefore, a lot of trading
participants had the bait not only to buy or sell certain goods for an
applicable price but to sell them higher—priced — to trade at the market.
In order to achieve success in this no picnic, it is necessary to forecast the
market behaviour in the future — to make a good prediction and thereunder to
sell, buy or do nothing.
In the first instance, there were as many forecasts
methods, which were used by market participants, as participants themselves.
Time passed, some of the methods faded and others became popular and were in progress. Eventually, methods of market analysis divided into two extensive branches: fundamental analysis and
technical analysis.
What do they mean? The fundamental analysis uses factors
for market predictions closely related to the trade subject — economic,
political. The technical analysis is based on the research of crowd behaviour
which is already known everything and which is taken into account all the
factors made the market.
From the viewpoint of technical analysis, there are a
number of patterns and dependencies confirming market behaviour (in fact — the
crowd of traders). The technical analyst does not try to understand why this
creature has a pulse of 20 beats per month, while it responds to a prick made by the needle in five minutes (this is a share of analyst — fundamentalist). He simply
notes all these facts and uses them for the prediction of this creature behaviour in
the future.
Technical analysis is not a science at present
moment. Everybody thinks so because intuitive to many professionals
regularities of market behaviour has not explicitly taken out yet. Generally, technical analysis is only a convenient tool for market data presentation.
To read these data is a skill, although the word «science» appears more often
in the literature about the technical analysis, for example, the well—known
analyst Tomas Demark called his book «Technical analysis — a new science».
The basic data for the technical analysis are only
two characteristics, they are the commodity price and the transactions volume with
it. Moreover, even these two characteristics by themselves are not interested,
we are interested in their behaviour in time.
Simply speaking, in the chart of
price and transactions volumes made with an asset over a definite period of
time. It is considered, that this set presents the history of market behaviour
provides all necessary things you need to analyze and predict its behaviour.
Why is the technical analysis so popular among
professionals for more than a century? Because it is so extensive, flexible and
utility! Judge yourself:
- methods of the technical analysis are suitable
at any market, whether they are soybeans
trading, corporative shares or currencies (at each market some methods work
better, others — worse and some of them do not work at all);
- an experienced stock gobbler works at many markets
all at once, trying to fatten his or her profit and decrease losses, so he/she
has no time to analyse thoroughly each of them, while the technical analysis is
the only way to follow all markets of interest, so to say, via one «window»;
- nowadays, there are so many methods of the
technical analysis that the analysis by itself can be regarded as a certain
erector, using parts of which any person can create his/her own unique system;
- finally, the technical analysis is a creative work
which can sweep anyone, but with a reasonable approach — realize a solid
profit.
Technical analysis is a research of the market
dynamics by means of diagrams, in order to predict the future trend of price
movement.
The term «market dynamics» includes three main
information sources which a technical analyst has at disposal, such as price,
volume and open interest. According to the fact that it is rather difficult to
determine the actual volume and open interest at the foreign exchange markets,
the major source for us will be the price. Hence is another definition:
Technical analysis is a study of past price
movements to predict future ones. The price movement is the most important
statistics in the world of technical analysis, as it is the only exact measure
of investors sentiment, reflecting the conjunction of supply and demand.
The technical analysis by itself is free of win —
win trading secret and is not a panacea for a trader. However, it can help a
calm and serious-minded trader to see a real picture of what is happening in
the market and to take an adequate decision.
In this technical theory, as in any other one,
there are basic postulates.
The basis of the technical analysis theory is based
on ideas formulated by one of the major developers of modern technical analysis
Charles Dow, who invented the world's most famous stock index Dow-Jones.
Let us examine these postulates in more detail,
there are three of them.
Market movements are considered by everyone:
This postulate is the most important in the
technical analysis, its meaning is necessary for adequate perception of all
analysis methods. Its main point is that any factor influencing the cost of
security - economic, political, psychological - are previously taken into
account and reflected at the price chart.
In other words, any price change
is an appropriate change in external factors. The main consequence of this
factor is the necessity to monitor and study the dynamics of price movements.
Analysing price charts and a lot of additional indicators, a technical
analyst obtains that the market itself indicates him the most likely direction
of the movement. This factor conflicts with the fundamental analysis, which
focuses on the study of the factors after the analysis of which conclusions according to the market motion are
appeared.
So, if the demand is outgrowing the supply, then the fundamental
analyst makes a conclusion that the price has been increased. The technical analyst
also makes a vice versa conclusion that, if the price increases, then the
demand is outgrowing the supply.
Prices move around directionally:
This assumption was the basis for the establishment
of all technical analysis methods, in far as the market affected by trends
unlike the chaotic market can be analyzed. There are two consequences from a statement that price motion is submitted to trends.
The first consequence is
that the current trend is more likely will further be in progress and will not
become the opposite of its own, so by this consequence the chaotic market
motion is excluded. The second consequence said that the current trend will
grow until the movement in the opposite direction starts.
History repeats itself:
The technical analysis and studies the market dynamics
are closely connected with the study of human psychology. Thus, graphic price
models which have been identified and classified in the last hundred years,
reflect the most important features of the psychological market state.
First of
all, they indicate what kind of moods — bullish or bearish is currently
dominated at the market. And if in the past these models worked, there are good
reasons to assume that they will work in the future because they are based on
human psychology, which does not change as the years go by.
It is possible to
represent the last "history repeats itself" postulate in a few other
words - the key to understanding the future lies in retrospective researches.
Lessons:
- Operations With Trader Platform On The Basis Of Meta Trader 4
- Introduction To The Technical Analysis, Dow Theory