Most people are familiar with technical analysis and often heard that analysis used technical analysis to analysis market trend. But, what exactly is technical analysis? Is technical analysis necessarily accurate? What are the common technical indicators?
Let’s explore them one by one!!
What is Technical Analysis?
Technical analysis usually takes the form of charts to predict future market’s behavior based on past price trends and trading volume data.
Simply put, it is to predict future price trends based on past price trends.
While the past and future price movements will not be exactly the same, similar price movements may occur. Technical analysis uses this law of the market, to look for patterns similar with the past price movements.
Technical analysis is interchangeable in financial markets and has become an important tool for many investors and traders. In contrast to technical analysis, which considers multiple factors related to asset prices, technical analysis strictly focuses on historical price movements. Therefore, this method can be used to check price fluctuations and trading volume. While many traders use this method to try to identify trends and favorable trading opportunities.
Is technical analysis necessarily accurate?
However, even based on the same charts and data, everyone’s ideas are different, and there will be different predictions.
Therefore, there are many methods and indicators derived from the technical side. However, all methods or indicators hold several important main points.
1. The stock price trend has certain regularity
The market situation is different every day. But in principle, it is repeatedly showing up, down, and flat fluctuations. Therefore, technical analysts believe that the stock price trend has a high probability of having a certain pattern, which can be used to predict the future trend.
Just like when the price trend clearly shows a W bottom pattern, it means that the price is usually more likely to rise.
And when the price trend clearly shows the M-head pattern, it means that the probability of the price falling will be greater.
2. History will repeat itself again and again
Price movements reflect the investors sentiment, even though the eras are different, the human desires are mostly the same. Therefore, the price fluctuation patterns that have appeared in the past few times are also high possibility to appear in the future. This is because the behavior of all investors will continue to repeat, which will cause the stock market to form a cycle. So analysts use this cycle to find out the favorable trends.
Just like most of the investors will wait for the price falls to a certain level before entering the market. Whenever this price arrives, investors will move on to buy, the price will rise naturally.
3. Market information will be directly reflected in the stock price
Market price movements reflect the intentions of all market investors. For example, if the stock price will rise, it means that most of the investors are buying than selling in the market. On the contrary, the stock price will fall, which means that most of the investors are selling than buying in the market.
Common technical indicators
1. Moving Average(MA)
MA are the most basic and ubiquitous indicators in the market and are used by almost every analyst. It is a technical indicator that draws a pattern after the average price of a certain period of time. MA is a technical indicator that draws a line after averaging the prices for a certain period of time. Through the direction and angle of the MA, investors could judge the current market conditions at a glance.
MAs can be divided into short-term, medium-term and long-term.
- Short-term: 5MA、10MA
- Medium-term: 20MA、60MA
- Long-term: 120MA、240MA
2. Moving Average Convergence & Divergence (MACD)
MACD is a technical indicator that uses both fast (short-term) and slow (long-term) lines.
When MACD crosses the signal line from bottom to top, it is called a golden-cross, which can be determined as a buying signal. On the other side, when the MACD crosses the signal line from top to bottom, it is called a death cross and is a sell signal.
MACD not only retains the effect of MA, but also removes the defect that MA send fake signals frequently. Hence, The MACD indicator has the characteristics of stability, which is suitable for judging the timing of buying and selling stocks and predicting the rise and fall of stock prices.
View more about MACD>>
3. Stochastic Oscillator (KD)
The KD stochastic indicator is an indicator that judges the level of the closing price based on the highest price and the lowest price in a certain period. KD Stochastic is composed of K value and D value, representing the momentum of buying and selling. In KD chart, two lines are represented on the chart respectively, the relative position of these two lines is used to judge the continuity of the stock price’s ups and downs. When the line fluctuates more than 80%, it can be judged as overbought, and when the line fluctuates below 20%, it can be judged as oversold.
View more about KD>>
4. Relative Strength Index (RSI)
RSI is a value calculated from the “average increase” and “average decrease” of the stock price during a certain period of time. It is mainly used to evaluate the “strength of both sides of the buying and selling order” in the market, and further predict that the price may rise or fall in the future.
RSI is a technical indicator that shows a line between 0% and 100%.
- When the RSI is greater than 80%, it is an overbought signal, the market is overheated, and the price will start to fall.
- On the contrary, when the RSI is less than 20%, it is an oversold signal, the market is supercooling, and the price is about to start to rise.
5. Bias Ratio (BIAS)
The bias ratio is the degree of distance between the price and the MA. It is used to measure the degree to which the current price deviates from the MA, and is mainly used to analyze a technical indicator of overbought or oversold in the short term.
The MA represents the trend of a certain period of time, so the price will gradually approach the MA. If the price is far from the MA, the probability of the price correcting to the MA will increase greatly.
- Positive bias: Price > MA, indicating overbought and might have downward or pressure.
- Negative bias: price < MA, indicating oversold, there will be a rising or rebound possibility.
Epilogue & Reminder
Although there are certain regular patterns in stock price movements and history may repeat itself, there is no trading method with a 100% winning rate or a technical analysis method that guarantees a certain effectiveness. Especially, traders should pay attention to the situation of “fake signal” in technical analysis. The so-called “fake signal” here refers to the phenomenon that the direction of price change is opposite to the trading signal. Hence, it is recommended that traders, no matter how useful the technical analysis methods they use, make sure and ready the risk control at any time to avoid losses due to “fake signals”.
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