Wednesday, April 22, 2015

The Fundamentals Of Technical Analysis

Technical analysis is appointed to analyze market movement (the
movement of prices, volumes and open interests) using the information
obtained for a past time. Mainly, it is the chart study of past behavior of
currencies prices in order to forecast their future performance. It is one of the
most significant tools available for the forecasting of financial markets. Such
analysis has been an increasingly utilized forecasting tool over the last two
The main strength of technical analysis is the flexibility with regard to
the underlying instrument, regarding the markets and regarding the time
frame. A trader who deals several currencies but specializes in one may easily
apply the same technical expertise to trading another currency. A trader who
specializes in spot trading can make a smooth transition to dealing currency
futures by using chart studies, because the same technical principles apply
over and over again, regardless of the market. Finally, different players have
different trading styles, objectives, and time frames.
Technical analysis is easy to compute what is important while the
technical services are becoming increasingly sophisticated and reasonably
Prior to this historic open market intervention, technical analysis

provided ample selling signals.
The Fundamental Principles of Technical Analysis are based on the Dow
Theory with the following main thesis:
1. The price is a comprehensive reflection of all the market forces. At
any given time, all market information and forces are reflected in the currency
2. Price movements are historically repetitive.
3. Price movements are trend followers.

4. The market has three trends: primary, secondary, and minor. The
primary trend has three phases: accumulation, run-up/run-down, and
distribution. In the accumulation phase the shrewdest traders enter new
positions. In the run-up/run-down phase, the majority of the market finally
"sees" the move and jumps on the bandwagon. Finally, in the distribution
phase, the keenest traders take their profits and close their positions while
the general trading interest slows down in an overshooting market. The
secondary trend is a correction to the primary trend and may retrace onethird,
one-half or two-thirds from the primary trend.
5. Volume must confirm the trend.
6. Trends exist until their reversals are confirmed. Figure 5.1. shows
example of reversals in a bearish currency market. The buying signals occur
at points A and B when the currency exceeds the previous highs.


 Cycles of currency price change are the propensity for events to repeat
themselves at roughly the same time and are an important ground to justify
the Dow Theory.
Cycle identification is a powerful tool that can be used in both the long
and the short term. The longer the term, the more significance a cycle has.
Figure 5.2. shows a series of three cycles. The top of the cycle (C) is called
the crest and the bottom (T) is known as trough. Analysts measure cycles
from trough to trough.
Cycles are gauged in terms of amplitude, period, and phase. The
amplitude shows the height of the cycle, the period shows the length of the
cycle, the phase shows the location of a wave trough.




No comments:

Post a Comment