There are two most popular methods of analysis on the market. Stock market investors, and cryptocurrency investors, make their investment decisions based on technical analysis or fundamental analysis. In today’s lesson, we will take a closer look at technical analysis. We will answer the question of what it is. We will talk about how it was created and what are its most important features. You will learn more about it in the following lessons. ☺ We will look at indicators, oscillators, strategies, and formations. Here we go!
How was technical analysis developed?
This method was developed in the 17th century. At first, it was used by Japanese traders. Its assumption was the ability to predict changes in the prices of certain goods. Nowadays, it is used to predict changes in the prices of given financial assets. Thanks to it, we can indicate specific trends that have already happened in history. Therefore, their consequences are often predictable for investors.
Technical analysis is a very broad and, one could say, so far- unspecified concept. Its basic definition is: a set of techniques aimed at predicting future price movements based on past price or volume changes. Its supporters claim that prices in markets move according to certain patterns, which can be analysed and observed with the right tools. It’s important for you to remember – technical analysis is a very universal tool that you can apply to virtually any market – be it the stock market or cryptocurrencies.
Principles of technical analysis
The most important rules of technical analysis include:
- The market wins everything – the market price of an asset, contains information about its micro – and macroeconomic situation. It also tells us about the political and economic conditions which are present in the market.
- Prices are subject to trends – prices follow certain trends: upward, downward and horizontal, until there are clear signals that indicate a trend reversal. As a reminder, a trend is the direction of price movement over a given period of time. As a trader, always follow the trend. It is your friend.
- History repeats itself – technical analysis predicts future price movements based on history, certain patterns-repeatable over time.
The main objectives of technical analysis:
- Finding regularities in asset prices.
- Identifying perfect moments to buy and sell.
- Maximizing profits while minimizing losses.
- Analysing and predicting investor behaviour in the market. Certain trends are recurring, making it possible to predict with high probability how investors will behave in the near future.
Charts as a basic tool for technical analysis
Analysts and traders analyse price movements, mainly using charts. Each of them carries different information. In the investment community, it is said that technical analysis is mainly based on them. The basic ones include:
- Linear – the simplest. The most well-known chart, but the least frequently used. Mainly because the only information it provides is the closing price of a given asset.
- Bar chart – by its structure, shows much more information than a line chart. It allows you to more clearly find support and resistance levels, as well as read prices from maximum to minimum. A bar chart is very commonly called an OHLC chart – open, high, low, close. According to what we can read from it.
- Point – often called an X (demand) O (supply) chart. Shows us how demand relates to supply. Tells us about price movements, without analysing time.
- Candlestick – you must have seen this before. Such charts can be found, for example, on the Tradingview platform. They have a green (white) candlestick body – upwards and a red (black) candlestick body – downwards. It is the most popular because it gives us the most information – the closing and opening price and the maximum and minimum.
As you delve deeper into the subject, you are sure to find your favourite chart.
Trends and technical analysis
As we mentioned at the beginning of our lesson today, prices are subject to trends. Being in the crypto world, you have heard the saying “Follow the trend, the trend is your friend”. And that’s accurately what it is. When using technical analysis to evaluate the price of an asset, you need to identify what trend the market is currently in.
Based on time, technical analysis distinguishes between short-term, medium-term and long-term trends:
- Short-term – lasts less than 3 weeks.
- Medium term – lasts from 3 weeks to 3 months.
- Long term – lasts for at least a year.
Considering the prices of an asset, we have a trend:
- Upward – upward price movement where we have increasing peaks and lows. The demand side dominates the market.
- Downtrend – downward price movement, where peaks and troughs are increasingly lower. The supply side dominates the market.
- Sideways – the supply and demand sides are in balance.
Technical Analysis – Patterns
Candlestick formations are helpful in short and long-term market analysis. These can be divided into trend reversal and trend continuation patterns:
Trend continuation and trend reversal formations are very useful tools if we want to find turning points on the charts. Whether you play with the trend and close your positions, or when you play against the trend and open positions at that point.
This group of formations includes:
- V formation.
- Flags.
- Banners.
- Triangles.
- Double bottoms.
- Head from shoulders.
- Inverted head from the shoulders.
- Saucer formation.
- Diamond.
- Island of retreat.
- Day of retreat.
Don’t stress if these names don’t mean anything to you so far – we’ll cover them in more detail in subsequent lessons.
Candlestick formations are also very useful. They appear on charts, they have a specific look and layout, but thanks to that they give us a lot of useful information. Understanding them allows you to identify changes that are taking place in the market. Candlestick patterns are also a signal of what trend is currently dominating the market.
Basic formations include:
- Three black crows.
- The shooting star.
- Black cloud cover.
- Harami.
- Harami cross.
- Hammer.
- The Hanged Man.
- The rising three methods.
- The falling three methods.
All chart analyses based on the above formations require patience, accuracy, and consistency. Do not be discouraged if something goes against your plan at the beginning. Krakow was not built in a day ☺.
Harmonic Formations
This is one of the components of technical analysis and is supported by price formations. They are recognized by the shape formed by changing prices. However – for a price pattern to become harmonic, certain conditions need to be met. Remember – there is never a perfect, textbook harmonic pattern.
Among the harmonic patterns, we can distinguish:
- Butterfly
- Bat
- Crab
- Gartley
As with price formations, harmonic formations require patience, knowledge, and accuracy. However, their skilled reading and understanding will allow you to maximize your profits.
Indicators
Before you start a technical analysis based on indicators, remember to learn its structure thoroughly. Each of them has its strengths and weaknesses. Of course – we are here to help, and in the following lessons we will certainly present them to you in detail. Traders and investors very often combine technical analysis with indicators. This is done to get a more solid, thorough; punctual reading and to predict market movements. With indicators, you can analyse prices based on special patterns. We divide them into those that analyse market strength, interpret time and price, or analyse volume.
Ichimoku
This is also one of the types of technical analysis. It is a very broad topic, which we can talk about for a long time. Today we will only look at it briefly. This chart analysis originated in Japan and is a very precise view of the market. Many traders do not need any other tools once they are thoroughly familiar with this method. However, before you start to analyse the market with Ichimoku, you need to know its components thoroughly: Ichimoku cloud, Tenkan-sen, Kijun-sen, Senkou Span A, Senkou Span B. As you can see, this is not the simplest solution.
Fibonacci
Another method that has found its way into technical analysis. Traders mainly use Fibonacci retracement, which are placed on the chart to find turning points. You can use Fibonacci levels in any market – crypto, stock market, securities. Using the Fibonacci sequence allows you to determine potential support and resistance levels, as well as stop loss and take profit levels. Everything in the Fibonacci sequence is based on the levels of the previous wave, but this topic will be given more attention in the future.
In-depth price analysis
The Price Action technique. This type of technical analysis uses candlestick and price analysis. By observing the price, trading decisions are made. There are no indicators, oscillators or Fibo retracements. This type of technical analysis is simple and therefore has the most followers.
Technical analysis – summary
So, is it worth using this model of analysis? Let’s now look at the pros and cons of this method:
| Advantages | Disadvantages |
| It is effective. | Market analysis is subjective and depends on the trader. |
| You do not focus on complex economic data. | Each analyst using this method may have a different opinion. |
| Charts show the current state of the market in a simple way. | It is a kind of art, applied to charts. |
| It is self-sufficient. Using auxiliary tools, i.e. formations, you will be able to make money on the market. | Using it gives you an impression of chance and randomness. |
| It is essential for short-term strategies. | Indicators in technical analysis are not universal. |
| Wide access to educational material. | A small change in the observation period can very significantly affect your investment decision. |
| It is the simplest form of analysis for those embarking on their investment adventure. |
Technical analysis, like many other indicators, never gives 100% signals. The information we read can often be misleading. However, a well-conducted technical analysis will improve your profitability in the market.
Test your knowledge on Kanga Exchange