Technical analysis - Persistence through the ages
When predicting the trading situation, a trader should certainly analyse the market using both technical and fundamental analysis methods. Without prejudice to the latter, it is safe to say that technical analysis is the predominant method for analyzing forex trading and market fundamentals.
Technical analysis is a method of forecasting future price movements based on mathematical deductions. Technical analysis was formed as a coherent theory and even philosophy only in the 70s of the 20th century. Until that time, it had been developing separately. At the beginning of the 20th century, charts were drawn manually and calculations were complicated by lack of computer facilities that could do the necessary amount of calculations in a short time.
But reading the literature on stock trading in those years, where the bestseller is undoubtedly E. Lefebvre's book "Reminiscences of a Stock Speculator" published for the first time in 1923, you can feel respect and piety for the masters of trading in those olden days.
At that time the main method was graphical analysis to identify trends, break through resistance and support lines, identify reversal patterns, etc. All necessary information for analytical work was made available to traders in those times from stingy telegraphic reports or from the pages of not always fresh newspapers, and the charts were drawn on a piece of paper, which happened to be at hand. But they knew what they were doing. Many world famous financial dynasties were born in those times of exchange trade beginning.
Somewhat later, traders began to calculate the average price. It was the first indicator, which made chart analysis much easier. Appearance of further indicators and oscillators, as well as improvement of averages, was made possible with the advent of computers. But, despite the fact that from the first exchange trades to date, a string of years has passed, ordered in the centuries, and technical analysis has evolved, its basics are still the same. They can be summarised as follows:
1. The price takes into account everything.
This postulate is based on the statement that all factors which influence the price, no matter political, economic or psychological, are already taken into account by the market and included in the value. Thus, it is sufficient to study the chart to predict future price movements.
2. Prices move directionally.
This axiom, in turn, is divided into two statements:
- an existing trend is more likely to continue than to reverse; - a trend exists until it weakens.
This postulate has become the key in graphical analysis and is the basis of technical analysis.
Technical analysis distinguishes between three types of trends:
- "Bullish" - price rises upwards, each successive high (low) is higher than the previous one; - A bearish trend - the price is falling and each successive high (low) is lower than the previous one; - "Flat" (or sideways) - the price moves in a certain corridor (channel).
A flat often occurs when trends change. More precisely, there is even a rule that says that any movement starts with a "flat" and ends with it.
Strictly speaking, prices do not move constantly and linearly up or down. It is simple: a bull trend increases prices faster and more than prices decrease, a bear market does the opposite, and a flat equates the upward movement with the downward one, and it is almost impossible to tell which one is dominant.
3 History repeats itself.
This postulate stresses the constancy of the laws of economics, psychology and physics at different periods of history and shows that the rules that were successfully applied in the past still work today and will continue to do so in the future. Technical analysis is eternal in this particular form and is suitable for all types of financial markets.
It is these seemingly simple definitions and laws, formulated with the experience of more than one generation of traders, that allow today's market players to count on making profits in their difficult activities.