Market Analysis: An Introduction to Technical Analysis

There are two methods to analyse the market before you make an investment. These are: technical analysis and fundamental analysis. While fundamental analysis involves analysing fundamental factors, technical analysis takes a completely different approach to market analysis. Technical analysis is done by focusing on price and volume of an asset. Traders who use technical analysis for analysing the market conditions are known as technicians. Technicians focus on price movements that occur in the market. Check out the trade exchange forex.

Basic Assumptions
Instead of calculating the intrinsic value of an asset, technicians use charts and technical indicators to identify a suitable trading situation. Technical analysis is based on certain assumptions that help traders in analysing the market. Here are the three basic assumptions of technical analysis.

The Market Discounts Everything
According to this assumption, the price of an asset at any given point of time reflects every necessary detail about the asset. It is also believed that the changes that occur due to fundamental factors are also getting reflected in the prices. Technicians also assume that market psychology is also indicated through the prices. Technicians refuse to consider any other factor separately. The major reason why fundamentalists criticise technicians is that technical analysis ignores the fundamental factors. Technical analysis theory views price movement as the product of demand and supply the asset has in the market.

History Repeats Itself
Another important assumption that is made in technical analysis is that history repeats itself. This basically means that price movements are repetitive in nature. The repetitive nature of price movement is due to the market psychology. The market participants operating in the market are believed to consistently react similarly to similar market stimuli over time. Many charts have been used for more than a hundred years, but they are still in use today because the price patterns repeat themselves.

Price Moves in Trend
Traders who use technical analysis to analyse the market believe that price movement follows trends. Thus, when a trend is established it should be assumed that the future price movement will be in the same direction of the established trend.

These assumptions help the traders to build their trading strategies.

Trend
A trend is one of the most important concepts in technical analysis. Here are three types of trends in the market:

Uptrend
An uptrend is when the prices are rising and it is assumed that they will continue to rise in future.

Downtrend
Downtrend occurs when the prices of a financial asset are falling downwards.

Sideways or horizontal movement
The sideways or horizontal movement is a phase when the prices are moving sideways without any significant peaks and troughs. This phase is also known as a trendless phase.

Trends also have different lengths. A trend in any direction can last long term, short term or for an intermediate time period.

Technical traders use different technical indicators along with support and resistance to predict the future of an asset. Technical analysis can be easily done by new traders, if they learn the basics of technical trading.

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Keywords: trade exchange forex

By: Adam de Smith

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