Technical analysis is a framework method formed by major investors in their study of price fluctuations. It is assumed that investors can extrapolate current trading conditions and future price trends based on historical price fluctuations, because technical analysis assumes that the latest information on the market has been reflected in price fluctuations.
Often investors look at past charts to find trends and patterns to help you get some good trading opportunities. When all investors rely on technical analysis, the patterns and indicators of these price fluctuations will fulfill themselves. As more and more investors look for the same price levels and chart patterns, these volatility patterns will be easier to form on the market.
Technical analysis has many advantages. Usually, in technical charts on different financial instruments, you can find more specific buy/sell points, which are easy for each investor to learn. Moreover, in most cases, technical analysis reflects all news changes in the market. After all, investors alone cannot always monitor the important factors affecting the global stock and FOREX market every day. Therefore, changes in technical analysis may inform investors in advance of the future or latest major news so that investors may be prepared for position risk management.
There are a wide variety of technical analysis applications, including universal indicators of RSI, MACD, KD, and moving average, and candlestick charts, which can help investors to assess the market, and make buy and sell decisions and implement take-profit/stop-loss strategies.
Take the Relative Strength Index (RSI) as an example. It is similar to the random oscillator. With a scale from 0 to 100, it also indicates whether the market is overbought or oversold. Normally, an RSI of under 30 means an oversold market, and an RSI of over 70 indicates an overbought market. You may make a buy strategy when a particular asset is oversold, or go short when it is overbought.
Technical analysis refers to predict future price trends by studying past price and transaction data. Technical analysis mainly relies on charts and formulas to estimate the market cycle length, and identify the buying/selling opportunities. Depending on the time span available, you can use intra-day (eg, minute, hour) technical analysis, or use weekly or monthly technical analysis.
Technical analysis mainly include:
1. Discover trends
Finding a dominant trend will help you see the overall market trend and give you more insight. Weekly and monthly chart analysis is best used to identify longer-term trends. Once you find the overall trend, you can find trading opportunities in the desired time span.
2. Support and resistance
Support and resistance positions are the points on the chart that experience sustained upward or downward pressure. When these points show a recurring trend, they are identified as support and resistance. The best time to buy/sell is near support/resistance levels that are not easily broken. However, once these positions are broken, they tend to become reverse obstacles. Therefore, in a bullish market, the broken resistance position may become support for an upward trend; however, in a bearish market, once the support position is broken, it will turn into resistance.
3. Trend lines and Channels
Trend lines is a simple and practical tool for identifying the direction of market trends. The upward straight line is made up of at least two consecutive low points, and the straight-line extension helps determine the path the market will move. Conversely, a downward line is drawn by connecting two or more points. To a certain extent, the volatility of trading lines is related to the number of connected points.
A Channel is defined as a trend line that is parallel to the corresponding trend line. The two lines can indicate the price fluctuation range of upward, downward or horizontal.
4. Moving Average
A moving average shows the average price at a specific time during a specific period. Because the moving average lags behind the market, it may not be a sign of a trend change. For this reason, moving averages are generally used by combining two averages of different time spans.
The buy signal usually is when the short-term average line goes up crosses the longer-term average line, and the sell signal is when the short-term average line goes down crosses the longer-period average line.
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