Feb 27 2009
Technical analysis is a form of analysis which tries to determine currency's future price and its performance. It can be done if we take into account stock's historical movement, its prices. The instrument's behaviour is determined by investors who push the prices to a certain level, which they think should be an adequate price for it. As we know, there is not much rationalism in different markets as traders are often trading on emotional basis, in other words traders make decisions in fear or in creed, and it is just human. But while studying the prices, we actually are analysing traders, in collected data we see the forming of different patterns which form upon traders' certain manner. When we have sufficient data about certain patterns, it is very obvious that we can predict instrument's next move, and thanks to it open a profitable position.
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But what embraces the technical analysis, one might ask.
The Dow Theory was a starting point to the technical analysis, it has three main principals: firstly, price reflects everything; secondly, price movement is not irregular; thirdly, the “what” is more important than “why”. There are principally three kind of charts on which technicians rely – line, bar, and candlestick chart.
The line chart is a line of dots principally, the dots depict the closing prices. The bar chart on the other hand is more complicated because it shows beside closing price the low, high, and open price. One bar can enact any given timeframe, for example a bar can be a sum of 30 trading minutes showing the highlights stated earlier.
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Although candlestick charts look alike to bar charts, they are a bit different. The main difference is that they have a body on each bar and a wick on the upperside and downside of the bar. It also indicates the low, high, closing, and open prices, but furthermore they have a colour code. If the candlestick is white, it indicates that the closing price was higher than the opening, shortly a bull candle. Black candlestick indicates that the closing was turned downward than opening, it is a bear candle therefore. And wicks or shadows, as they are sometimes called, show the peaks and bottoms on the given timeframe. It must be stated that candlestick charts are one of the best charts for analysing the market from a technical aspect.
In the beginning of studying technical analysis it is best to start determining currency's support and resistance levels on a chart. Setting a support level, which is a price line that supports the price against falling any further, helps to get an selling signal. Resistance level on the contrary determines the possible take profit level.
Another aspect is to distinguish uptrend or downtrend. It is vital to follow the trend while trading as it will improve the profits. No wonder there is a aphorism that trend is your friend.
Technical analysis is very intricated, and new methods for analysing the charts are still evolving. It takes a lot of effort to work through different indicators, to learn how they work and on which circumstances they are best at. But eventually it will pay off, and one must always remember there is no easy way to fast profits.
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