The financial market is quite huge and requires traders to analyse the market well before investing. But is analyses and study of the market enough to trade, or are there other perspectives that would be required to be looked at?
Yes, is the answer: the massive trade market needs a handful of tools to be confident of the decisions. There are trading platforms, software, fundamental tools, expert advisors, technical tools and whatnot to be successful in the volatile market. Still, 90% of traders face difficulties in the market due to their lack of knowledge, experience, strategies and research.
The main motive of a trader is to maximise their profits and be a high volume trader, which all runs around the price that a trader invests and earns from the market. Thus, making price an important factor that impacts the trade. To study price, traders use technical analysis and charts of various kinds to understand the price market.
What is Technical Analysis?
Technical analysis is the study instrument that is used globally for good market research. It is a trading discipline that evaluates and identifies the market investments to find better trade opportunities. The analysis uses various techniques to study the impact of the factors; it could be statistical data, history of trade or trading activities.
A trader primarily focuses on the price trends of the instrument and the chart patterns to get an insight into the financial market. On the other hand, the analysts of technical analysis believe that price changes and past trade activities are good indicators of market trends and opportunities.
However, these are totally different from the fundamental analysis, which analyses the economical, social and political factors that impact the financial market. A trader has to be clear about the techniques required for the instrument analysis. Therefore, the study of technical analysis is vital for the study of trade and the market.
What is Chartism?
Similar to the technical analysis yet different, chartism is a technique used for the study of the financial market and its instruments. The technique monitors the price movements of various securities to have a forecast. It may be a forex currency, stocks, indices or commodities. Through the patterns formed on charts, traders study the movements and fluctuations of price to get an idea of the trend.
Traders, through these patterns formed on charts, get signals about buying and selling market positions. The trading platforms that brokers provide have these charts and pattern options to help traders. Thus, a trader can use the software for a better approach to the trade market.
However, there are chartists who can help traders with the market study. They are technical analysts that form the charts and graphs for predicting the future trends of the market. Thus, these are part of technical analysis tools having a significant place in the market.
The charts make it easy to study the change with the movements of the lines. Then, traders have to follow the patterns formed with intellect to make a market move.
Technical Analysis — A deep study
Technical analysis studies the historical market factors to predict the future changes in price and volume of the trade. With these, a trader can make informed decisions and have a successful trade journey. Technical analysis uses tools such as:
- Charts and graphs
- Financial metrics
All these are necessary for the trend study and get into the market details. Traders won’t be able to predict the changes and maximise their profits without use of the technical tools. The most essential of the tools that are easy and quick to use are charts and graphs.
There are various forms of charts that a trader can use to have appropriate trade indicators for entry and exit and trend study. Here, we have the charts for study:
If traders remember, they have been using the charts from school days- in mathematics class or even in science projects. So, line charts are pretty familiar to the traders or even the general public. Studying the lines formed is not difficult; however, traders have to understand the use of the line in the particular market.
A basic chart with lines map the movement of the price of a security; it may be shares, currency or other instruments. Traders of the market use the line charts often for basic trade ideas. The tool does not get into the details of the market changes but gives traders a general idea of the price movements and the trend.
The bar charts are a step forward from the line chart and are a bit complicated to study. The lines in the bar chart formed in vertical shape forming bars, with each line telling about the price’s opening, closing, high and low movements. The bar chart in single form shows the price change of a single trading session.
Traders, if once understand the use of bar charts they can easily study the factors of the financial markets. The bars formed on the charts are in vertical form, with each bar holding some price factors that affect the market.
Candlestick charts are popular among market traders as these are frequently used for the study of trends, opening and closing price changes and other factors of the price fluctuations. The stick of the candle forms various patterns that are used to get market insight. It graphically represents the price movements through the candlesticks of a particular market movement.
For recognising the candlestick pattern, traders have to study the various patterns to understand and predict them appropriately. There are some predefined rules of the chart and patterns that a trader should be familiar with. Some of the famous candlestick patterns are Big black candles, Doji, Inverted hammer etc.
The three technical analysis tools discussed above are part of chartism that traders frequently use for market updates. Being used on a daily basis, the charts have patterns that are formed during particular situations. Traders have to be aware of the patterns and should study them in detail for correct assumptions and profitable trades.
We have got familiar with the most basic chart patterns, and the tools traders use for technical analysis of the market. Before going further into technical analysis, we must understand the significance of the time frame. Time frame is the duration that a trader chooses to study the chart patterns. A trader cannot randomly go and check the pattern; there is an appropriate time and duration that they prefer for the market study.
A time frame could be:
- Monthly charts
- Weekly charts
- End of the day charts
- Intraday charts
Traders even have the option to customise their time frames as per their needs.
Oscillators, indicators, strategies and financial metrics are the technical analysis tools used by traders of the financial markets other than the charts. These all play a vital role in trade, as every factor has its significance.
An oscillator is a technical tool that conducts the high and low bands to study the market. The high and low bands formed between two extreme values indicate the trader about the trend. The bands fluctuate in the bounds and keep indicating the traders about the market changes. These movements are used to predict using comparison of prices, analysing the reversal and other factors.
Indicators are the general technical tool that assists traders to analyse the market. It focuses on the history of price changes of the trading instrument. Based on which traders decide their future trade decisions.
Financial metrics tell traders about the price change, studying the profitability and efficiency of the trading instrument. There are several kinds of financial metrics that traders can use relating to sales, operating margins etc.
Strategies are essential for a trader to achieve the desired goal. A plan and strategy would help traders take action in a sudden situation and how traders are supposed to handle the situation. If the trade plans in advance, they can manage uncertain situations with ease.
Assumptions of Technical Analysis
Technical analysis works on certain assumptions that make it feasible for traders to study the change. The analysis is different from fundamental analysis and does not consider the valuation of the instrument in the market. It only focuses on the price and volume of instruments to have instruments fluctuations forecasted in advance.
Here are the certain assumptions of technical analysis:
Price reveals everything:
The first assumption on which the technical analysis is based is that market information, its knowns and unknowns all are reflected in the price of the instrument. A trader has to analyse the market thoroughly through the price fluctuations, which gives a forecast of the market and the changes that may occur.
For example, if a trader is interested in the shares of a company and he witnesses an increase in the price of the share that he would like to buy the shares. The exact reason for the price movement may not be known, but if the price and volume increase, it indicates buying action. The reason for the change may be the company’s services, market goodwill, economical factors, or the company’s shares being bought by an insider of the company. So, the price change reveals all the information required to invest.
Price moves in trend:
The second assumption is that the major changes in the market are an outcome of the trend. The trend of the market is the necessity of trade without which one cannot invest in a particular market instrument. For example, if the shares of a company recently showed an upward trend which took place over a period of months, so traders studied the market and its trend. Once the trend is established in the market, the price moves in the direction of the trend, which makes it easier for traders to invest.
The price increase and decrease are dependent on certain factors every trader knows, but they are hardly interested in why the price increased and decreased. The main focus is on how the price fluctuated. Take, for example, an insider purchased the shares of the company, which affected the price of the shares, and its price increased. So, an investor would be interested in how the price increased then why it increased. The reaction of price change to certain conditions is necessary for the trader in technical analysis.
In technical analysis, it is believed that history repeats itself. The price trend repeats in specific situations, which happens due to the constant reaction of market traders to the price movements. The price moves in similar ways in some situations of the market, which a trader analyses to take as a note in further trade. For example, if the price of an instrument is falling, then the trader prefers selling the instrument, whereas the opposite happens in an upward trend. The trader buys the instrument at high prices for greater benefits. So, it sets in the mind of humans that history repeats itself.
The trade market is massive, requiring the attention of traders every second to be successful. A trader cannot keep an eye 24 hours and seven days a week; to solve this, there are technical analysis and chartism tools to help traders. With the tools, traders are able to predict the changes in advance and take calculated decisions for maximising the profits.
Although, traders have to keep in mind that an analysis may be wrong as well due to the market volatility. The financial market is affected by several factors, and technical analysis’s primary focus is the price movements. So, traders should consider all other fundamental analysis tools to be more confident of their trade, enjoy profits and enhance their trading skills.
Traders for getting these trading tools may use brokers services as they provide trading platforms for various account types. A reputed broker like ETFinance would serve traders with all the required services to earn profits and double their investments with less investments.