Technical analysis is crucial to good investment strategy, but the exact process behind it can seem arcane to uninitiated. Newcomers may have to be swayed by a few compulsive mistakes to understand the practical truth of this statement. Technical analysis makes use of the many tools and data out there to make future forecasting with past data. Technical analysis will minimize emotion and enchance trading discipline.
This science, like all estimations provides a generalized overview of what is more likely to happen within volatile markets. Looking at price histories will give investors an informed view of their buys. Is it a fair? Do past histories indicate a cyclical or risky volatility? If so, how likely is it that buying during a specific time will land one right in the center of another high risk period?
Answering these question relies on making a few assumptions. Fundamental market decisions must reflect a thorough knowledge of price data. Differing opinions and tactics can easily damage effective technical analysis. The patterns indicated through historical data are likely to repeat themselves barring a sporadic market event that will likely be a surprise to all involved, even the most seasoned investors.
Uncovering this cyclical patterns is sometimes quite easy, at other times, not so much. This is where technological tools and hired guns are brought in to the picture. While it is known that trends rule the markets, technical analysts do not buy into random events in market data. Every price trend indicates a certain algorythm that must be observed and acted upon. These fluctuations indicate whether it is safer to buy or sell within a market.
Bars and Candlestick: Representations of Time
Strength and sustainability are two features of a market that play a big part in technical analysis, especially in Forex trading, where trends are going up and down everyday. The tool used to examine these are bar charts and candlestick charts. Both show price action. Bars within a chart represent a period of time whether 2 minutes long or 2 years. These charts are a visual representation of trends occuring within time, and those who are visual may have an advantage.
Point & Figure Charts
These data charts, while similar to bar and candlestick charts, use Xs and Os to indicate price direction. These charts are based on mobility of a market, and do not consider time scales. These charts should also be used in combination with bar and candlestick charts. Technical indicators derived from this type of analysis can indicated up, down, or sideways trends in the market. Identifying whether a trend is strong, weak, or volatile will ultimately dictate the best course of action for investment.
Trend Indicators
Strength indicators are descriptive of the patterns identified. Strength indicators relate to the intensity of market movement, which is dependant on mass opinion and open interest. Volatility represents magnitude of fluctuations, which will differ from time period to time period. Cycle indicators will show market patterns that repeat seasonally. Once again, time will give greater depth to considerations of other trends.
Momentum show whether a trend is strong or weak.
At the end of the day, technical analysis is all about finding patterns through in depth analysis of data that can sometimes diverge in a stochastic manner. While some individuals can get quite good at analyzing data in a certain way, successful investing can sometimes require the use of an outside pair of eyes and for this purpose a good broker like AlfaTrade is a must.
Although technical analysis can improve investment decisions, it takes time and experience to really understand charts, data and trends. Professional technical analysis can reduce much of the headache involved with interpreting these charts, however it is important to at least understand the fundamentals.