Technical Analysis is nothing more than the study of supply and demand. The trader must be able to predict “the future market movements” using technical analysis in order to buy or sell at a certain moment with the purpose of getting a profit.
When too much people are buying, the prices go up, when too much people are selling, the prices go down. Since transaction is a result of the participant's emotions, the market becomes quite hard to predict. That's why you may have heard about literally hundreds of analysis methods.
As a trader, the struggle is to get ahead of the market trend and determine whether it is good to buy or sell.
Furthermore, technical analysis consists of three branches of analysis and dynamics:
- Visual analysis – Looking at specific charts and drawing conclusions based on its representation
- Structure analysis – Predicting price trends for a later period of time using chart patterns like trend confirmation and trend reversal formations
- Market motivators – Evaluate how strong fundamental assets will be and to recognize situations that may happen in the future regarding selling or buying too much
This is the first analysis type a beginner should familiarize with. It focuses on visualization of prices through line charts, bar charts, candlestick charts, point and figure, and so on. Being able to read these graphs is crucial in the trading, and with technical analysis, reading price changes in the market are essential.
Data is frightening sometimes, but practice makes master and becomes easier and more clear.
The structure analysis, which focuses on interpreting chart patterns and formations. Analyzing patterns such as confirmation and reversal patterns help traders make predictions of future price trends that are the most likely to occur in the market.
Market motivators look into the strengths of trends we see in the market. To visualize the strength of a specific trend, we look at indicators, which also looks into possible trend breaks and the overall direction of the trend. When a trader determines whether to buy or sell, they look at whether a trend is strong enough to keep going and if so, how long it will run for before breaking.
Besides indicators, there are also Oscillators. Oscillators, or sometimes called relative indicators, recognize situations in which overbuying and overselling occurs. Using this, traders can make smarter decisions and avoid these types of situations in order to maximize profit and avoid losses.
The triple combination
Combining all analysis types as well as the knowledge of supply and demand is what makes up technical analysis. Knowing the right time to buy and sell as a trader is an essential part of trading, so knowing how technical analysis works will only benefit traders in the long run.