Technical analysis is the process of forecasting the development of a market situation based on the history of repetition of changes in situations with similar parameters.
In fact, this forecasting method occupies a well-deserved place in the priorities of professionals due to the inviolability of its postulates:
1. History repeats itself. This is how the basic law of TA sounds. We all know that this statement is logical not only for studying historical price charts of any instrument, but also for any chain of events in historical perspective: for example, A. Einstein said: “The biggest stupidity is to do the same thing and expect different results.” And this statement is also true because it shows that the price is changing under someone’s influence – intentionally or unconsciously. So, for example, if the price approached a strong psychological price level, and before that, when approaching, it always bounced (moved in the opposite direction for a relatively short time) – where will the price go this time? That’s right – rebound! Thus, having accumulated a sufficient number of so-called patterns (repetitive graphical situations), it will not be difficult to predict the further development of events with a high degree of accuracy.
2. Price movement is subject to trends. Everything is more or less clear here: there are not so many directions of price movement along the Y axis (price) – up (in the direction of ticker price growth) and down (in the direction of price fall). There is also a sideways movement – a flat, but it can be distinguished only in ranges and trade from the boundaries of such ranges, joyfully calculating profits. It is important to remember the unspoken rule of traders, closely related to this postulate – trend is your friend (trend is your friend). This is especially true when you are trying to open a deal against an existing trend, which is especially dangerous for the deposit!
2.1. The existing trend will continue until the formation of a signal for its change.
3. The price takes everything into account. This means that everything, absolutely everything that could affect the value of the instrument up to the current second has already affected: from the speeches of the head of the National Bank last week, the release of unemployment data, to the transaction on this instrument made by Soros in order to confuse traders on the site – the price displayed in your terminal has already been taken into account. This postulate also states that a prospective price change will also take into account the reaction of traders who, with the volume of their transactions, will react to the price approaching, for example, to the psychological level of 1.3000 and, being confident of an imminent rebound (a relatively short-term movement opposite to the previous one), all, without saying a word, will open speculative positions in the same direction, gradually moving the price to where it is necessary!
It may seem to someone that three postulates are not enough for such a strong and authoritative forecasting method, but we, experts with extensive experience, assure you that it is enough!
In order to understand how these principles are applied in practice, it is important to understand that the only parameter of technical analysis that changes mathematically is price. It is from its changes that the schedule consists. The article Types of graphs describes in sufficient detail how various options for displaying the history of such changes are formed.
And since the price, in fact, is a figure, it is quite logical that it can be substituted into any formula to get another graphical tool – an indicator. The best minds of the planet in pursuit of the “holy grail of the trader”, which gives the key to inexhaustible profits, have developed many effective forecasting methods based on mathematical analysis. Their names are forever inscribed in the history of trading!
The bad news is that the “holy Grail” really does not exist!
The good news is that this does not prevent us from earning steadily! It is important to understand that any tool is good only for a certain situation and only in the right hands, i.e. the result will be influenced not by the presence of the tool in your hands, but by the skill of your hands. That’s what we need to work on.
But your ability to read the data of these instruments, the ability to combine indicators with fundamental analysis data and parameters of other circumstances affecting trading – this can be called successful trading!