Understanding технический анализ this method of market forecasting

Core Points

• Technical analysis is a method of predicting price movements based on historical data and trading volumes, rather than just trend forecasting.
• Traders use a variety of tools - from simple support/resistance levels to complex combinations of moving averages, RSI, MACD, and Bollinger Bands.
• Trading signals help to find entry and exit points, but it's important to remember false signals, especially in short-term trading and low liquidity.
• Effective risk management and cross-verification of data are essential for success.

How and when technical analysis originated

The origins of technical analysis date back to the 17th century (Amsterdam) and the 18th century (Japan), but it took on its modern form thanks to the work of financial journalist Charles Dow, founder of The Wall Street Journal. Dow was one of the first to notice a pattern: assets and markets move according to certain trends that can be broken down and studied. His Dow theory became the foundation for the development of technical analysis.

In the early stages, analysis was conducted manually using tables and calculations. With the advancement of technology, the toolkit has significantly expanded, and today technical analysis is a standard tool for most traders and investors.

The Principle of Technical Analysis

The main premise: all available information is already reflected in the asset's price. By studying price patterns and volumes, future movements can be predicted.

Technical analysis is, in essence, the study of the balance of supply and demand — a reflection of the overall market sentiment. The price of an asset is formed by the opposing forces of selling and buying, which are closely tied to the emotions of participants (fear and greed).

Technical analysis demonstrates the highest effectiveness in markets with high volatility and liquidity, operating under normal conditions. In such markets, there are fewer opportunities for manipulation and the influence of anomalous external factors that distort the results of the analysis.

Key Indicators

Moving Averages (MA)

Simple Moving Average (SMA) calculates the average price over a specified period, smoothing out short-term price fluctuations.

Exponential Moving Average (EMA) gives more weight to the most recent data, making it more responsive to new information.

Moving averages help to determine the direction of the trend and potential levels of support or resistance. A popular strategy is to analyze the crossover of short-term and long-term MAs to generate buy/sell signals.

Relative Strength Index (RSI)

RSI is a momentum oscillator in the range of 0–100, measuring the intensity and direction of price fluctuations. A value above 70 signals overbought (possible sell signal), while below 30 signals oversold (possible buy signal).

Bollinger Bands (BB)

Bollinger Bands consist of two lines positioned on either side of a moving average. They are used to assess volatility and identify overbought/oversold conditions of the asset.

Convergence-Divergence of Moving Averages (MACD)

MACD is a momentum indicator that shows the relationship between two exponential moving averages. It consists of the MACD line, the signal line, and the histogram, which help identify potential trading signals.

Trading Signals in Action

Indicators serve not only to understand the overall trend but also to obtain specific entry and exit signals:

• Overbought/Oversold Signals: RSI and similar tools indicate when an asset is overbought ( potential for selling ) or oversold ( potential for buying )
• Golden Cross and Death Cross: when the short-term MA crosses the long-term MA from above, a bullish signal occurs; crossing from below gives a bearish signal.
• MACD Signals: the crossing of the MACD line and the signal line from above indicates a bullish trend, while from below indicates a bearish trend.

It is important to consider: indicators do not always provide accurate signals, especially in short-term trading. Many false triggers occur in illiquid markets. To minimize losses, it is necessary to use indicators in combination with risk management methods.

Critical Assessments of Technical Analysis

Experts often refer to technical analysis as an unreliable method or a “self-fulfilling prophecy” — a phenomenon that occurs solely because a large number of participants believe in it.

Key Critical Arguments:

• Self-fulfilling: some believe that TA works because many traders use the same indicators, creating predictable market reactions.
• Subjectivity of Interpretation: Reading charts and patterns can be subjective, leading to different conclusions among different traders.
• Instability during anomalies: the effectiveness of TA decreases during periods of extreme volatility and unforeseen market shocks.

However, proponents defend TA, arguing that each trader has an individual approach to analyzing charts and indicators. With such a variety of methods, it is unlikely that a single strategy will emerge that is both reliable and universal.

Technical and Fundamental Analysis: Comparison

Technical analysis focuses on historical prices and patterns, while fundamental analysis assesses the intrinsic value of an asset through financial reports, economic indicators, and qualitative factors.

Scope of application:

• TA: is ideal for short-term trading strategies and finding optimal entry/exit points
• Fundamental analysis: better suited for long-term investment decisions and assessing the potential of an asset

Most experienced investors combine both approaches to make informed decisions.

Final Recommendations

Considering the arguments of critics and supporters, many experts recommend using both methods of analysis. Fundamental analysis supports long-term investment strategies, while technical analysis is a tool for gathering current information on short-term market conditions, which is useful for both traders and investors looking to optimize their market entry timing.