Every week we provide insights into popular assets and hot questions, so you can easily learn more about the investment market in bite-sized pieces.
In this Markets in Focus we take a closer look at the Technical Analysis: What Is It and How Does It Work?
What Is the Basis of Technical Analysis
Technical analysis is fundamentally rooted in the Dow Theory, a set of principles developed by Charles Dow between 1851 and 1902. These principles provide traders with guidelines on market behavior, including the different types of trends, the phases of price movements, and the impact of news on the market. While modern technical analysis has significantly advanced with new technologies and automation capabilities, Dow's original concepts still form the foundation of its practical application today.
Key Principles of Technical Analysis
In general, technical analysis revolves around the following core principles:
- Charts Tell a Story: Advocates of technical analysis believe that by examining historical price data, they can predict future market movements.
- Market Price Movements Show Trends: According to the Dow Theory, trends exist within three time frames: primary movements (lasting one or more years), secondary reactions (lasting from ten days to a year), and minor movements (lasting from a few seconds to several days).
- Historical Trends Repeat Themselves: Analysts believe that price patterns tend to repeat over time. By studying past price movements, they aim to determine optimal entry and exit points to maximize profits.
Advantages of Technical Analysis
- Determining Entry and Exit Points: Technical analysis (TA) helps traders identify potentially favorable entry and exit points on a chart.
- Complete Picture: Charts reflect market sentiment, psychology, and supply and demand, providing a comprehensive view of the market situation.
- Objectivity: Charts display objective data such as price and volume, enabling quick and unbiased analysis.
Disadvantages of Technical Analysis
Despite its benefits, technical analysis has some drawbacks:
- Not an Exact Science: The interpretation of charts can vary among traders, leading to different conclusions and potential confusion.
- Not Always Accurate: Since TA relies on historical price data, there’s no guarantee that past patterns will repeat themselves. However, it does offer insights into the likely direction of a financial instrument’s price like a CFD.
Don't Doubt When Closing a CFD Trade
Whenever you close a trade based on a news strategy or TA, it's important not to let doubt creep in. In the ever-changing CFD market, new opportunities always present themselves. Keep in mind that the most profitable CFD trades are often those that aren’t second-guessed in moments of doubt.
We wish you a successful trading week on the Change App.
Until next week!
