What is technical analysis?
This is the main tool for predicting the course, which uses the majority of private clients. The ancestor of this type of analysis is the journalist Charles Dow, author of the famous Dow Jones index and co-founder of Dow Jones&Company — one of the world’s leading financial information agencies and publisher of the Wall Street Journal. In the late 1890s, Charles Dow, in the wall Street Journal, outlined some ideas concerning the commodity and securities markets that later became the basis of such a discipline as Forex technical analysis.
Charles Dow fixed the following foundations of the art of forecasting market fluctuations:
1. The market takes everything into account.
2. Price movements are subject to trends.
3. History repeats itself.
The market takes everything into account The first postulate means that the price includes all information, past, present, future, and even insider information. Already at the end of the nineteenth century, information spread quite quickly and over time, such an advantage as the time of obtaining information came to nought. And even if it concerns the insider, it is not clear how the market will react to the news, positively or negatively. Therefore, it makes no sense for traders to analyze news, economic statistics, etc. to predict quotes.
Price movements are subject to trends. Charles noticed that the vibrations on the instruments did not move randomly but in a certain direction. This can be an up or down trend, or the value can move in the sideways direction, and certain drivers are needed to change the trend. This conclusion was made after evaluating the movements of underlying assets in the XIX century.
History repeats itself. Price fluctuations are a reflection of the moods of bidders and traders react more or less equally to situations that are similar to each other. Looking at the historical chart, you can find that the cycles do not change, as well as the psychology of the bidders. Bubbles will inflate and deflate, and private investors will also buy tops and sell bottoms. And based on this information, you can predict further quotes by correctly forming the trading system.
Price charts and their types
The cost of a financial instrument (stock, bond, futures, etc.) is the main source for graphical and computer technical analysis. But it doesn’t have much of predictive ability and won ‘t give us specific recommendations on trading. However, if we consider the estimate from different time points (timeframes: month, week, day, hour, five minutes, etc.), we will be able to assess the dynamics in the past.
Charts are undoubtedly the most popular tool for assessing market conditions, as they are quite clear and have a wide range of functions for studying fluctuations. There are a lot of options for creating charts today, but here are the most popular ones: linear, column, and candlestick.
More detail on the typology of graphs will be presented in the following lessons.