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In one of our previous articles from the Blockchain Academy series, we described the basic definitions related to trading: we explained – among other things – what day trading and margin trading are. To better explain how to succeed as a trader, we decided more articles were needed in order to introduce you to the world of technical analysis.
First, let us recall that daily transactions are being made on a short-term basis, usually within a single day. Very often, investors focus during the day on executing the largest possible number of profitable transactions, usually going for a smaller profit. If these transactions are concluded over a longer period, it’s more of an investment than normal trading.
In the case of day trading, there are two main methods of analyzing your steps before coming to a decision. The first method is fundamental analysis – it consists of assessing the value of assets available to you from financial statements or evaluating the prospectives of a given industry. The second is technical analysis, the basics of which we will discuss in this article. Fundamental analysis answers the question “what value to buy or sell?”, while technical analysis asks – “when to do it?”
Technical analysis is the oldest form of analysis within the security market. It was already used in the seventeenth century by Japanese rice traders. The roots of modern technical analysis come from the theory formulated by Charles Dow around 1900.
Conclusions based on the past
What is technical analysis exactly? It’s simply a process of drawing conclusions from previous price fluctuations. Based on what happened, we anticipate what might happen in the future. It is worth mentioning that fundamental analysis is not excluded from technical analysis – it’s even better when both compliment each other.
Continuing further with technical analysis, it should be emphasized that it focuses mainly on the analysis of demand and supply, i.e. the two main variables that determine the price. It is a universal method that can be used on the stock exchange market, indices, raw materials, the currency market, but also it works just as well with the cryptocurrency market. Where the price is, technical analysis can be applied – of course, only if it’s adapted to the specifications of a given market.
There are three basic principles on which technical analysis is based:
- The market discounts everything
It means that all information about the asset is included directly in the price of its shares. Therefore, it is not necessary to analyze political or economic factors because they are fully reflected in the chart.
- History repeats itself
The technical analysis concerns predicting the future based on previous research, assuming that the collective behaviour of investors on a given market is repeated in accordance with specific patterns.
- Prices are subject to trends
Prices depend on certain trends and will be subject to them until there are clear signals announcing the reversal of the process. It is a matter of the fact that the market is not chaotic – with a simple graph, we can determine whether there is an upward or a downward trend. The technical analyst starts work by determining these market trends, which persist until there is any significant event that could break and/or reverse them.
All information needed for technical analysis is read directly from charts, showing historical price changes of the analyzed security, currency, or raw material. Properly conducted technical analysis requires the use of appropriate tools, such as indicators and charts. What’s more, we mainly use three types of data: price, time, and volume. The technical analysis indicator takes into account these parameters, calculates and informs us whether it is worth buying or selling.
In the next article, we will introduce you to the world of technical analysis indicators. Stay with us!