Technical analysis

According to the research methods, market analysts can be formally divided into «physicists» and «lyricists». Traders argue what type of analysis is the best — the fundamental («lyric») or technical analysis of financial markets, didn’t reveal the winner, but gave a powerful impulse to the development of both research trends.

Due to the rapid development of computer technology and the agiotage demand for various kinds of Expert Advisers, «physicists» blossom out. Technical analysis of the Forex market under which the main developments are done, increases the number of «techies» on other, more conservative exchanges (stock market, trading futures).

Followers of mathematical modeling methods stand firmly behind the technical analysis, which doesn’t take into the account the reasons of price changes, but focuses on its future movement, basing on historical patterns in similar circumstances.

Basis of technical analysis

The methods of technical analysis base on the study of price fluctuation charts. Traders who use this type of analytics are interested only in two parameters: what happens to the current price and what is its historical retrospective.

Basic postulates of technical analysis

Price incorporates everything. Millions of different factors affect the process of price formation. The most professional and reliable analytical agencies are unable to take into account all these factors. Price shows the results of its work in the form of changing values. Analysis of the dynamics of price fluctuations is the path to the necessary forecast.

Trend and his «life» on the chart. Price fluctuations lead to the formation of prevailing vectors of movement — trends. On graphic charts trend movement is displayed by a channel, the upper and the lower boundaries of which are usually called resistance (top) and support (bottom) levels. Traders skill level is determined by the ability quickly find the trend and open buy/sell orders in the corridor (traders use the term «channel») in time. If the trend reversal point (global trend change) is indicated correctly, then this is a top performance.

Repeat cycles. Outstanding characteristics that appear on the charts in typical forms — patterns (figures by which analysts find out whether trend continues or reverses). There is a trade strategy based on the patterns where all possible patterns are classified into «reversal figures» and «trend continuation».

Indicators of technical analysis

Computer programs helped traders get to a whole new level of graphic research. Basis of technical analysis are no longer imagined without additional instruments — indicators and oscillators have become integral part of technical analysis. In almost all trading platforms basic indicators are installed by default:

Trend indicators of technical analysis

•     ZigZag
•     Parabolic SAR
•     ADX
•     CCI
•     Bollinger Bands
•     Moving Averadge
•     Standart Devition

Oscillators

•     ATR
•     Momentum
•     MACD
•     Stochastik oscillator
•     DeMarker
•     Force Index

Instruments named after their genius creators: Fibonacci levels, Gann Grid, Andrew’s Pitchfork.

Technical analysis for novice traders should not foolhardily believe automated analytics. It is necessary to overcome the difficulties of learning graphic combinations at the initial stage. However, in future traders usually use 2-3 indicators, which suit individual trading strategy. It is important to understand that no indicators of technical analysis can replace the main «indicator» — knowledge and intuition.

Popular methods

Technical analysis uses level method and method of moving averages.

Support/resistance levels.There are common situations when the price can not overcome some certain barriers — several times reverses, moving up and down. In this case, traders build horizontal lines connecting several points of rising and decreasing price peaks. The upper horizontal boundary is called resistance level, the lower one is called support level. Two methods are used in the trading strategy: trade on bounces (channel strategy) and breakdowns. Both methods require the usage of several analytical tools (technical analysis indicators will be rather useful).

Moving averages. Moving averages in technical analysis base on the prices for a certain time period with the help of special formulas. Their graphics helps to determine the quality signals to open positions. Convenient indicators of technical analysis to add moving averages to the chart: MACD, Moving Average. (More detailed information — Schwager «Technical Analysis Course for Beginners»).

Characteristics of technical analysis on various trading platforms

Technical analysis is a common method for all financial markets. The basic principles of TA are applied in trading currency, shares, futures and other financial assets.

Technical analysis of securities and futures markets has its own outstanding characteristics, in comparison with the technical analysis of Forex. The main problem of technical analysis of futures market is:

• difference in the accounting units of listed commodities;
•     execution time limit;
•     mandatory deposit.

These factors have a significant influence on prices’ forecasting and complicate trader’s analytical process.

Technical analysis for the novice traders

Technical analysis study program compulsorily include the following parts:

• Term technical analysis. Technical analysis of Forex and other markets;
• Chart’s types;
• Trends;
• Levels, channels;
• Trade on different timeframes;
• Patterns’ classification;
• Candlestick analysis;
• Indicators and oscillators.

Must-read books for technical analysis, which should become a book of books of technical analyst:

• John J. Murphy «Technical Analysis of the Futures Markets»
• Elder «Trading for a living»
• Williams «Trading chaos»
• Reuters «Technical analysis. Training for beginners»

Software for the technical analysis

The most popular software for the technical analysis:

•     Metastock;
•     Omega Trade Station;
•     Amibroker, Wealth-Lab.