How does Technical Analysis Work?

 Two words that are often heard and used in the world of economics are supply and demand. If you have taken any level of an economics class in school, these two words must have come up all throughout the course. In the world of trading, the study of supply and demand is what defines technical analysis. 

Traders analyze and predict future market movements using technical analysis and then selling and buying at certain periods where they believe they would profit the most. It is very important to look at how prices are changing as that will determine whether or not it is right to either buy or sell. When traders believe that the value of the market is lower than usual, they buy more, leading to a little or significant price increase. The opposite is true for when traders believe that the market value is high, leading to more selling and a decrease in price. 

As a trader, it is very important to keep an eye on how the market is trending, as that will help you determine if it is the right time to buy or sell. To be ahead of the game, realizing these changes earlier on is crucial for gaining the most you can on any particular transaction. It is also very important that as someone who is new to the world of trading, using technical analysis will not yield results with investments. Instead of focusing on intrinsic value, technical analysis is used as another tool for getting clues into the future market movements of prices, as well as determining the most optimal times to buy and sell. 

Furthermore, technical analysis is comprised of three branches of analysis and dynamics: 

  1. Visualization analysis – Looking at specific charts and drawing conclusions based on its representation
  2. Formation analysis – Predicting price trends for a later period of time using chart patterns like trend confirmation and trend reversal formations
  3. Market dynamics – Evaluate how strong fundamental assets will be and to recognize situations that may happen in the future regarding selling or buying too much 

Visualization analysis

It is very important that those who aren’t experienced with trading or have no experience at all focus on visualization analysis first. What it focuses on is visualization prices through line charts, bar charts, candlestick charts, point and figure, and so on. Being able to read these graphs is crucial in the trading, and with technical analysis, reading price changes in the market are essential. 

Reading these charts may first be intimidating because all of that is going on, but once a new trader realizes that visualization analysis shows a lot of the same concepts that former and current students have seen in their classes, then using technical analysis becomes easier and more clear. 

Formation analysis

The formation analysis, which focuses on interpreting chart patterns and formations. Analyzing patterns such as confirmation and reversal patterns help traders make predictions of future price trends that are the most likely to occur in the market. Having an idea of what the future looks like is important when figuring out the right time to buy and sell. “How much should I buy and sell based on this reversal pattern?” This is just one question a trader may have using formation analysis and gives them a sense of direction to make smarter choices currently and in the future. 

Market dynamics

Market dynamics looks into the strengths of trends we see in the market. To visualize the strength of a specific trend, we look at indicators, which also looks into possible trend breaks and the overall direction of the trend. When a trader determines whether to buy or sell, they look at whether a trend is strong enough to keep going and if so, how long it will run for before breaking. 

Besides indicators, there are also Oscillators. Oscillators, or sometimes called relative indicators, recognize situations in which overbuying and overselling occurs. Using this, traders can make smarter decisions and avoid these types of situations in order to maximize profit and avoid losses. 

The triple combination

 Combining Visualization analysis, formation analysis, and market dynamics, as well as the knowledge of supply and demand is what makes up technical analysis. Knowing the right time to buy and sell as a trader is an essential part of trading, so knowing how technical analysis works will only benefit traders in the long run. 

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Is Technical Analysis useful ?