For those who are asking themselves, “What is technical analysis of the stock market?”, We will discuss the origins of this method of analysis in this article.
It should be noted that modern Forex technical analysis has existed since supply and demand based markets exist.
The first example of stock market analysis dates back to the 17th century and concerns Dutch traders. In particular, we find the second example in the 18th century with traders specializing in Japanese rice!
At the end of the 19th century (still far from thinking that one day we would be doing graphic analysis of Bitcoin), the discipline of technical analysis in the stock market grew with the help of the editor and founder of the Wall Street Journal, Charles Dow.
But in addition to Charles Dow, other of his contemporary compatriots were pioneers in the graphical analysis of actions, such as:
Wyckoff was perhaps the first stock exchange psychologist, who defended the idea that the market had all the historical data necessary for technical analysis and had to be seen as a single entity.
His teachings are still taught among the best universities in the United States!
For most of the twentieth century and throughout history, stock analysis has been limited to graphical analysis, or also called graph analysis on the stock exchange.
This means that there were no indicators. Yes it’s true! At the time, we were negotiating without the use of a single technical analysis indicator! This also means that today, in the digital age, we are probably in the golden age of technical analysis!
Let’s look at the principles on which technical analysis is based.
The logical structure and justification for the technical analysis derives from one of the premises of Dow’s theory, which states that the price accurately reflects all the information that affects it.
Therefore, any factor that impacts supply and demand (the main forces driving prices) will inevitably end up on the charts.
Price action traders consider that data on the main events or publications in the economic calendar are mostly useless because they are not quantifiable and reliable.
Thus, the difference between technical analysis and fundamental analysis is that the second is based on the principles that support the asset, while the first is based exclusively on the asset’s historical prices.
Technical analysts defend the characteristic that the market moves in trends or technical patterns – another mention of Dow’s Theory.
Markets can move in:
Source: GOLD, Chart H4, MT5 Admiral Markets. Data range: February 4, 2019 to March 21, 2019. Performed on January 29, 2020. Note that past performance is not a reliable indicator of future results.
The markets are in a side lane about 60% of the time, so it is very important to identify trends. It is worth remembering that the statistical analysis of Forex does not care much about the reasons.
For example, “why is a trend occurring?” It would be a reasonable question, but for a technical analysis professional it is totally irrelevant because he would not know how to quantify it. For him, the existence of trends is an empirically proven fact and is the only thing that interests him and catches his attention.
To determine the trend, technical analysis uses several tools, including price charts.
The graphs seek to identify patterns, whether they are trend, reversal or range.
To identify these patterns, traders have developed and perfected a series of graphical tools for analyzing graphs. These tools started with the support and resistance lines , that is, the channels that the price covers and allows to determine their meaning and the price levels that should be considered.
This analysis can be further refined by using a series of technical indicators that are applied directly to the graphs in real time.
We will analyze all of this in more detail later in this article.
To talk about the third basic premise of technical Forex analysis, let’s try not to go too deep in the philosophical or psychological field. Nor will we try to prove or disprove that humans function in patterns.
Technical traders agree that investors operate based on their set of standards. Because of this behavior, they believe they can identify patterns and open highly profitable operations, and that all they need is a small statistical advantage multiplied by repetitions and leverage .
It is not a good idea to use only technical Forex analysis. This analysis is often used in combination with fundamental analysis or market sentiment. Although people who use technical analysis are experts in identifying and confirming trends, it is the fundamental factors that lead to the conditions for the development of these same trends.
One last thing to consider is the backtesting method, also known as historical verification, in which traders use previous price records to test a particular trading strategy.
However, as with other statistical discoveries in other spheres of the human field, past data does not guarantee that a pattern will be repeated. It is just a tool.
In addition, backtesting requires knowledge of the exact market conditions to establish entry and exit points.
Having explained the general and theoretical concepts of technical analysis, let’s go to action!
The first thing we need is a trading platform to be able to observe the price movement on the charts and, in this way, carry out our chart analysis. So, if you don’t have a platform yet, download it for free by clicking on the image below … and you will have it in a matter of seconds!