Types of charts

Introduction

Technical Analysis is one of the most used methods by investors to devise a trading strategy. These technical analysts examine price data of an asset (Stock, Currency, Commodity, etc) to determine the probable future price movement of the assets.

Technical analysis involves the use of charts as a tool to identify patterns or trends in a currency market.

Although technical analysis is often related to fundamental analysis, it focuses on the effects of market movements, rather than the causes. Investors who use this strategy always look at an asset’s past price to determine what might happen in the future.

The basic principles of technical analysis

  1. The market value of an asset is related to demand and supply factors operating in the market.
  2. There are both rational and irrational factors which surround the supply and demand of an asset.
  3. Asset prices behave in a manner that their movement is continuous in a particular direction for some length of time.
  4. Trends in asset prices have been seen to change when there is a shift in the demand and supply factors.
  5. Shifts in supply and demand can be identified through charts prepared to show market action.
  6. Patterns which are projected by charts record price movements and these recorded patterns are used by analysts to make forecasts about the movement of prices in the future.

Assumptions of Technical Analysis

Technical analysis is built on certain fundamental assumptions in which a market operates. The assumptions are:

The market discounts everything

According to the efficient market hypothesis, an asset’s price reflects everything that has or could affect a company including the fundamental factors. This is why technical analysts believe that everything from a company’s fundamentals to broad market factors to market psychology is already priced into the asset.

In short, technical analysts only have to analyse price movements since everything is already included in the price of an asset.

Price moves in trends

Technical analysts believe that prices move in short, medium and long-term trends. Hence, an asset price is more likely to continue a past trend than move erratically.

Most technical trading strategies are based on this assumption.

History tends to repeat itself

As per technical analysts, history tends to repeat itself. The repetitive price movements are attributed to market psychology which is predictable based on emotions such as fear or excitement

Technical analysis uses chart patterns to analyze these emotions and subsequent market movements to understand trends. Technical analysis is considered a powerful tool because it can illustrate patterns in price movements that often repeat themselves.

Moreover, technical analysis can be used for any asset with historical trading data such as stocks, commodities, fixed-income, currencies, and other securities.