Technical analysis is a method of price forecasting based on information about market quotes, volume, and open interest. The main of the three components is the price, the study of which by the methods of technical analysis is the most convenient because the information about the price is publicly available and has a long history.
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Technical analysis differs from other types of analysis also by the fact that it is based on mathematical and statistical, rather than economic calculations. Here are the principles of technical analysis:
Price movements in the market take into account all the information.
According to this axiom, all information influencing the price of goods is already taken into account in the price and volume of trade, and there is no need to study separately the dependence of price on political, economic and other factors. It is enough to focus on the price/volume dynamics and get the direction of the most likely market development.
Price movements are subjected to trends.
Each price change may seem random. But the set of changes for some period can form trends (tendencies), that is, time series of prices can be broken down into intervals in which price changes in certain directions prevail. When demand exceeds supply, there is an upward trend. If supply exceeds demand, there is a downward trend. When supply and demand balance each other, there is a horizontal trend (sideways, flat, some say "no trend"). Trends are not infinite. In some limits, it is believed that the probability of continuation of the current trend is higher than the probability of its change. But at a certain stage, the trend can be replaced by the opposite movement.
History repeats itself.
Market participants behave in the same way in similar circumstances, forming a similar dynamics of price changes. This allows applying graphical models of price changes, identified based on analysis of historical data.
The following statistical indicators of trades are used as primary information for technical analysis:
- Price at which deals are made.
- Trading volume.
- Indicators of supply and demand.
The simplest price chart is a tick chart (each current price value is marked by a point and connected to the previous point by a line).
However, the technical analysis uses the forms of charts based on previously formed statistical data - Japanese candlesticks, renko, kagi, crosses. Such charts can be used as independent models of technical analysis, and in combination with additional tools in the form of geometric shapes or special charts, formed on top of or near the price chart.