Technical analysis

Technical analysis relies on historical data and tries to predict the future based on that. Every analyst and trader should keep this in mind.

Three important assumptions which are inevitable if one wants to accept the conclusions as correct.

The first condition is that all information is reflected in the market price. The price isn’t generated by the chart, but by the supply and demand.

The second condition is that market prices always move in trends. The real task of the analyst is to recognise and identify the trends.

The last assumption is that prices reflect human behaviour and the history repeats itself. Closer examination of the below mentioned factors can lead to more punctual predictions.

Technical analysis consists of several tasks and branches. There are statistical analysts working with traditional chartist.

If the assumptions are right, mathematical statistics can provide advantages and past data can improve our forecasts.

Random Walk Theory states that the market price changes are independent and conclusions should not be drawn from past events.

The name of Charles Dow cannot be unknown as he has constructed the Dow Jones Industrial Average. The study published as Dow Theory is a milestone in the history of technical analysis.

Shorter and longer trends are often illustrated based on different scaling principles. The linear and logarithmic scaling methods are show on the same chart.

Capital markets move in trends. The biggest task of technical analysts is to identify trends. The trends can be Bullish, Bearish, and Neutral.

Finding the potential support and resistance levels helps to determine the direction of the trend. In this lesson, it is shown how peaks and troughs determine the support and resistance lines.

Determining the strength of the potential support and resistance lines is based on the following factors: volume, time horizon, newness, and integers. In this subchapter the psychology of trendlines is introduced.

Prices often move in channels along the trends. In this lesson the breakouts from channels and the target price calculation is described.

Correction or pull-back is when the share price moves in the opposite direction of the current trend. Many believes that the number sequences constructed by the famous Italian mathematician, Leonardo Fibonacci, determines the correction levels.

Reversal days are easy to recognise since they are always located at high or low at the end of the trend.

Market gap is a price range in which no trading happened. They are typical for markets where trading is not continuous. There are different types of gaps, this lessons describes them with examples and illustrations.

The most famous theory of the technical analysis is the Elliott Wave Theory, which was developed by Ralph Nelson Elliott. The main statement of Elliott is that the capital and money markets do not move chaotically and show cyclic waves.

A short summary of the steps of technical analysis. It is necessary to prepare a technical checklist to make sure no step is left out.