Basic Concept Of Technical Analysis For The Beginner

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June 5, 2020

Basic Concept of Technical Analysis for the Beginner

Many wonder what technical analysis is and usage. Below is the basic concept of what and why for the technical analysis!

What is Technical Analysis?

Technical analysis is the method of forecasting future price trends, evaluating investments, and identifying trading opportunities by analyzing the historical statistics gathered from trading activities and market behaviors. There are three fundamental sources of information for technical analysis: past price, volume, and open interest. 

All the technical analyses are built upon three premises:

1. The market discounts everything

All basic events, no matter politically, economically, socially, or otherwise, that may influence the price, will reflect in the market. Therefore, the prices change related to the relationship between demand and supply. On the other hand, if the price is rising, demand must exceed supply and vice versa. This presumption is the cornerstone of technical analysis since it is believed that all the impact of information from the fundamental analysis will eventually reflect on prices during trading.

2. Price moves in trends

This premise is the most fundamental but essential because the purpose of technical analysis is to identify the trend with historical data and estimate the future following the trend. We can understand the price movement with the concept of Newton’s first law of motion: Price will keep moving in the direction of the trend due to “inertia”. This movement will not be changed unless there is an external force on it. Therefore, the entire future movement is predictably flowing the historical trend until there is a sign of change.

3. History tends to repeat itself

Technical analysis is closely related to human psychology and behavior. The trends of price movements are repetitive but also predictable based on the market emotion: fear or excitement. Technical analysis takes those emotions and market-changing into consideration, using chart patterns so that the future trend will be easily identified when under the same circumstances.

How To Use Technical Analysis?

Technical analysis can be used on any security as long as we have historical data of this security. This method of analysis, different from fundamental analysis, relies on historical data of price, volume, volatility and etc. 

Technical analysis is very useful to discover the current price movement trend and therefore evaluate the security and release short-term trading signals on time. However, since technical analysis only needs data from a short period of time so that this method is more helpful for short-term trading. On the contrary, fundamental analysis mainly relies on information over the years. If technical analysis can be utilized combined with fundamental analysis, it can be much more efficient and effective to evaluate long-term investments.

Yaonology uses the TradingView platform to show the example of the moving average indicator. Moving averages is a common usage of technical analysis. As the below chart shows, the blue line is moving average (MA). When the MA is higher than the stock price, it is the buying point. When the MA is lower than the stock price, it is the selling point.

Basic Concept Of Technical Analysis For The Beginner
Source: Yaonology

Yaonology creates our own algorithmic trading strategies based on economic data and technical analysis. We create the most reliable trading signals based on our strategies for our clients! The below picture demonstrates the Yaonology S&P500 strategies and signals!

Basic Concept Of Technical Analysis For The Beginner
Source: Yaonology

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