What is Technical analysis?
The framework in which traders study the price movement is called technical analysis.
Moreover, the is theory is that a person looks into previous price movements and predicts
price. A person who uses technical analysis is called a technical analyst. Generally, traders
who use technical analysis are called technical traders.
The fact that all current market information is theoretically reflected in the price is the most
a compelling argument for utilizing technical analysis.
“It's all in the charts!” is a common belief among technical traders. This simply indicates that
the present market price includes all available fundamental information. If price reflects all
available information, then price action is all that is required to make a transaction. Technical
analysis examines the price action's rhythm, flow, and trends. Have you ever heard the phrase
that " history tends to repeat itself"?
That is, after all, the essence of technical analysis!
If a given price has previously served as a major support or resistance level, forex traders will
keep an eye out for it and base their trades on it. Technical analysts seek patterns that have
formed in the past and form trading ideas based on the belief that price would act in the same
manner it did previously. Technical analysis is more about PROBABILITY than it is about
prediction. Technical analysis is the study of historical price activity in an attempt to detect
trends and predict price direction in the future.
How to study historical price action?
When someone says "technical analysis" in the trading world, the first thing that comes to
mind is a chart. Charts are used by technical analysts because they are the simplest way to
display past data!
Technical analysts are known as chartists because they live, eat, and breathe charts. You can
use historical data to discover trends and patterns that could lead to profitable trading
chances. Furthermore, with so many traders relying on technical analysis, these price patterns
and indication signals have a tendency to become self-fulfilling.
The more forex traders who are looking for specific price levels and chart patterns, the more
probable these patterns will appear in the markets.
However, you should be aware that technical analysis is highly subjective.
Just because Mathew, Damon, Jack, and Raphael are all looking at the same chart setup or
indicators doesn't imply they'll all have the same idea about where the price is going.
50-Day EMA and 200-Day EMA
Moving averages look back at price action over a specific time period. They subdivide the
total to create a running average that’s updated with each new bar. In a nutshell, the 50-day
EMA is used to measure the average intermediate price of a security, while the 200-day EMA
measures the average long-term price. The 50- and 200-day exponential moving averages
(EMAs) are more responsive versions of their better-known cousins, simple moving averages
Mean Reversion Indicators
Bollinger bands (20, 2) try to identify these turning points by measuring how far price can
travel from a central tendency pivot—the 20-day SMA in this case—before triggering a
the reversionary impulse to move back to the mean. The bands also contract and expand in
reaction to volatility fluctuations, showing observant traders when this hidden force is no
longer an obstacle to rapid price movement.
Relative Strength Indicators
These cycles often reach a peak at overbought or oversold levels and then shift in the
opposite direction, with the two indicator lines crossing over. Market movement evolves
through buy-and-sell cycles that can be identified through stochastics (14,7,3) and other
relative strength indicators. Look for signals where: A crossover has occurred at or near an
overbought or oversold level Indicator lines then thrust toward the centre of the panel. This
two-tiered confirmation is necessary because stochastics can oscillate near extreme levels for
long periods in strongly trending markets.
Moving average convergence divergence (MACD) indicator, set at 12, 26, 9, gives novice
traders a powerful tool to examine rapid price change. This classic momentum tool measures
how fast a particular market is moving while it attempts to pinpoint natural turning points.
The height or depth of the histogram, as well as the speed of change, all interact to generate a
variety of useful market data. Buy or sell signals go off when the histogram reaches a peak
and reverses course to pierce through the zero lines. The fourth triggers a whipsaw that’s
evident when the histogram fails to penetrate the zero line. The first signal flags waning
momentum, while the second captures a directional thrust that unfolds right after the signal
The indicator adds up buying and selling activity, establishing whether bulls or bears are
winning the battle for higher or lower prices. For example, between January and April, Bank
of America (BAC) proved this when prices hit a higher high while OBV hit a lower high,
signalling a bearish divergence preceding a steep decline. Keep volume histograms under
your price bars to examine current levels of interest in a particular security or market. You
can also place a 50-day average of volume across the indicator to see how the current session
compares with historic activity. Now add on-balance volume (OBV), an accumulation-
distribution indicator, to complete your snapshot of transaction flow.
The Bottom Line
Choosing the right technical indicators is daunting but can be managed if novice traders focus
the effects into five categories of market research: trend, mean reversion, relative strength,
momentum, and volume. Once they’ve added effective indicators for each category, they can
begin the long but satisfying process of tweaking inputs to match their trading styles and risk