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Technical Analysis

What is Technical Analysis?

Although the Japanese invented the system now called Japanese Candles 700 years ago,for trading in rice obviously, Charles Dow (of Dow-Jones fame) is considered the father of the modern technical methodAt the end of the 19th century, Dow defined the five principles on which the modern method of technical analysis is based and published them in an article entitled "The Dow Theory"

The method has been used for over 100 years to analyse the market using graphs to read price trends and identifybuying and sellig signals in currencies in movment. .

The method's three basic tenets:

  • The graph embodies everything and provides the maximum information.
  • Markets move according to trends – up, down or treading water.
  • History repeats itself – what was will be .

By analysing graphs that represent the investment channel the user is analysing, the technical analyst can identify:

  • The direction of trading.
  • Possible entry and exit points.
  • Time and price objectives.

Trend momentum etc. The method is first and foremost aimed at making it possible for an investor to implement self-discipline principlesin a convenient and simple manner according to the disposition and experience of each technical analyst, and to minimise the potential loss inherent in any investment in the capital market Fundamental to the effective implementation of the method of technical analysis for the purposes of making successful investments in the capital market is the ability to clearly identify entry points and firmly define exit points while striving determinedly to enter and exit according to the principles decided uponThus in practice the relative advantage the method gives its users over other trading methods or random-emotional actions by the investor is put to use

The Philosophy of Technical Analysis

There are two contrasting philosophical approaches guiding technical analysts, however both of them reach the same conclusion that changes in the market must be recognised from the outset - one approach assumes that the markets are sophisticated in the sense that no single player in the market can move it Price changes in the market reflect the equilibrium at any given moment of mass behaviour.The other approach argues that the market is unsophisticated and that most of the movements can be attributed to a small number of interested players and large financial bodies Action by a few of these bodies is sufficient to affect prices in the market The assumption is that large financial bodies have an advantage over small investors in their understanding and processing of fundamental information (e.g. financial statements, economic indicators etc.) The advantage is reflected in greater availability of information, superior computational ability, manpower etc. According to this approach, the technical analyst must identify price movements from the outset on the assumption that they reflect decisions taken by an entity that has a better grasp of fundamental considerations than they do This approach explains why the technical method is suitable mainly for small investors and unsuitable for large financial bodies.The main purpose of technical analysis is to identify a new trend as soon as possible (so as to join it) and minimise risk (in the event of a mistake) Early identification of a trend increases the potential to profit from it but also increases the risk of mistaken identity On the other hand,the more confirmed the trend,the more apparent it is, and the smaller the potential to profit from it and the greater the risk that it will pass and a new trend will take its place .

What is fundamental analysis?

Fundamental analysis is precisely that. It is carried out on historical and current data, but with the aim of creating financial forecasts by comparing the historical data with the current data. A trader acting according to the method of fundamental analysis does so mainly by reading the economic data of that country/share/commodity, and by comparing them to the relevant past data he/she can identify trends in the financial asset being traded.

Example of fundamental analysis:

  • Consumer Price Index
  • Manufacturers Price Index
  • Interest rates in the economy
  • Crude Oil Stocks Report
  • Number of employed in the economy
  • House prices in the economy
  • Unemployment rate

The data is published online in real time and traders act accordingly. very piece of data is of economic significance to the specific financial asset and can to a great extent affect the asset's price.

To go to the financial data log click here

Swing Trading

Swing trading is a method of trading in the short- medium-term.Swing transactions can be for periods of 2-25 days.The method makes it possible to profit from strong fluctuations over time in currency-linked instruments.The advantage of swing trading is that it allows the private trader to be actively and independently involved in the foreign currency market with the aim of creating a regular entry in their free time without having to sit opposite the screen for long periods and of running a low and precalculated risk.The classic swing trading method is to identify a trend of treading water so as to assess objectives and enter on the breakout from the resistance or support levels, setting profit and loss targets in advance, and from then on managing the transaction is automatic.

According to the Dow Theory, the market moves according to three fixed trends:

  • Long-term trend – from a few months to a year, in a monthly/weekly graph (the big picture).
  • Secondary trend – a number of days to a number of months, in a weekly/daily graph (the direction of trading).
  • Minor trend – a few hours to a few days, in a daily graph (entry and exit timing).
  • The decision on the direction of trading is taken according to the secondary trend.
  • The decision to enter a transaction and exit from it is taken according to the minor trend.
  • Newcomers to trading are recommended to begin with the longest periods.