For beginners: What is technical analysis?
When we enter the world of the stock market, we observe concepts such as: technical analysis, fundamental analysis, indicators, oscillators, resistances, figures, graphics with many figures and different colors , at first it seems very complicated interpretation, but with the basic concepts clarified we can start to make small studies of the evolution of stock prices in the markets.
What is technical analysis?
The Technical Analysis is a tool that facilitates investment decision making without the need of complex knowledge in economics, the mathematics used is very simple and is available to any small investor and does not require any monetary outlay to access their different tools. Indicators.
The technical analysis is an instrument designed to study any market value, stocks, indices, derivatives, commodities, etc. The objective of the technical analysis is to predict the future evolution of the price of an asset based on the evolution of the price that the asset has had in the past. The purpose of Technical Analysis is to predict the behavior of prices to determine the signals of purchase and sale, based on the psychology of the masses and in which most investors behave in a rational manner.
For this we do not conduct an economic study of the asset or fundamental analysis, based on the company’s balance sheets or other financial information. It does not attempt to estimate whether the stock, index or raw material it studies is expensive or cheap from the economic or fundamental point of view, only tries to predict the future evolution of its price, not its value. The technical analysis, within the stock market analysis, is the study of market action, mainly through the use of graphs, with the purpose of predicting future trends or evolutions in the price.
Technical Analysis: History
The technical analysis had its origins in the US between 1899 and 1902 with Charles Henry Dow publishing in the Wall Street Journal the first concepts on the evolution of prices of stock shares, using graphics and creating the Theory of Dow, acquired a great momentum with Ralph Nelson Elliott within the stock markets with his Elliott Wave Theory. In 1930 it begins to study the analysis of time series of prices and find the first regularities of trends.
It is in 1950 when W. Gann formulates the first technical oscillators to take advantage of the repetitive situations of the prices by means of mathematical and geometric principles and at the beginning of the 60 is when what we know as Technical Analysis arises when introducing a battery of technical oscillators that will be used together with the price charts.
Technical Analysis: Main components
There are three main accessible and public data that are used in the study of the price of the action, in the technical analysis it is important to have all the historical data of the series, because it will provide us with greater precision in the estimates:
- Price or quotation: The most important variable of market action. It is usually represented by a bar graph. In the graphics it is located at the top.
- Stock volume: The number of units or contracts operated during a certain period. It is represented as a vertical bar under the quotation graph.
- Open interest: Used mainly in futures and options, represents the number of contracts that remain open at the end of the period. It is represented as a continuous line below the price action, but above the volume.
Technical analysis: Categories
The technical analysis can really be divided into 2 different disciplines or types of analysis; graphic analysis (or chartist) and technical analysis. Both complement each other very well and in the vast majority of cases they are used in an integrated manner as a single whole, being called the technical analysis set.
- Graphic analysis or chart analysis: analyzes exclusively the information revealed in the graphs, without the use of additional tools. Study the graphic figures that the prices of the asset (stock, index, raw material, etc.) are drawing over time. Graphic analysis includes trend lines, channels, triangles, shoulder-head-shoulder, etc.
- Technical analysis in the strict sense: it uses indicators calculated according to the different characteristic variables of the behavior of the analyzed values. The technical analysis tries to automate and objectivize the analysis of price movements through mathematical calculations that are reflected in indicators such as Stochastic, MACD, RSI, ADX, etc.
Technical Analysis: Characteristics
The characteristics of the technical analysis are the following:
- The technical analysis only studies the price of the asset and the volume traded. It considers that all the information (income statements, balance sheets, GDP, inflation, money flows, etc.) referring to that market is perfectly reflected in those 2 only variables.
- The prices already reflect everything related to fundamental data, macroeconomics, etc. through the decisions (purchases and sales) that people who have analyzed all that information have taken. You could say that the price of an asset is the “summary” of the knowledge of all the people who have studied that asset from all possible points of view. The price discounted everything, what is really argued is that the price reflects changes in the balance between supply and demand.
- The technical analysis is designed to study very liquid markets, in which no operator has a dominant power over others. Therefore, when using technical analysis to analyze a market, it is essential to study the liquidity of that market and if there is a large investor that monopolizes most of the operations carried out.
- The price moves in trends, the concept of trend is absolutely essential for the technical approach. The main objective of the technical analysis is to identify a trend in its early stage, to establish operations in the direction of that trend.
- History repeats, much of the technical approach is based on the study of human psychology, so this principle is equivalent to saying that human beings tend to react in the same way to circumstances that tend to be the same. It is assumed that if they worked in the past, they will work again in the future. Another way of expressing it is that the key to understanding the future is the study of the past. Finally Stock Market Courses is the best option for you.