Technical analysis

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Technical analysis is a methodology used for forecasting the direction of prices through the study of past market data, primarily price and volume. It is widely used in the field of finance and trading to evaluate and predict the future price movements of securities, such as stocks, bonds, and commodities.

History

The origins of technical analysis can be traced back to the late 19th century with the work of Charles Dow, who developed the Dow Theory. Dow's work laid the foundation for modern technical analysis, emphasizing the importance of market trends and the behavior of market participants.

Principles

Technical analysis is based on three main principles:

1. Market action discounts everything: This principle suggests that all known information is already reflected in the price of a security.
2. Prices move in trends: According to this principle, prices tend to move in a specific direction (up, down, or sideways) for a period of time.
3. History tends to repeat itself: This principle is based on the idea that market psychology tends to repeat over time, leading to similar price patterns.

Tools and Techniques

Technical analysts use a variety of tools and techniques to analyze price movements, including:

• Charts: Visual representations of price movements over time, such as line charts, bar charts, and candlestick charts.
• Technical indicators: Mathematical calculations based on price, volume, or open interest, such as moving averages, relative strength index (RSI), and MACD.
• Chart patterns: Recognizable shapes formed by price movements, such as head and shoulders, double top and double bottom, and triangles.
• Trend lines: Lines drawn on a chart to identify the direction of the trend.
• Support and resistance: Levels at which prices tend to stop and reverse.

Criticism

Technical analysis has faced criticism from some quarters, particularly from proponents of the efficient market hypothesis (EMH), which argues that it is impossible to consistently achieve higher returns than the overall market through technical analysis. Critics also point out that technical analysis is subjective and relies heavily on the interpretation of patterns and indicators.

Applications

Despite the criticism, technical analysis remains a popular tool among traders and investors. It is used in various markets, including stock markets, forex markets, and cryptocurrency markets. Technical analysis is often used in conjunction with fundamental analysis to make more informed trading decisions.

See also

• Fundamental analysis
• Quantitative analysis (finance)
• Algorithmic trading
• Market sentiment
• Behavioral finance