What Is Technical Analysis?
3 min read · · Korean original
Contents 4
Hello, this is Bitpunk. What is technical analysis, and how can you use it for stocks, Bitcoin, futures, options and more? In this post, we'll look at the concept of technical analysis, the basics of how to use it, and its limitations.
What Is Technical Analysis?
Technical analysis turns trading activity, such as price movements and trading volume, into statistics and presents them as indicators. With these, investors can look for investment opportunities that suit them.
Unlike fundamental analysis, which examines an asset's business model, sales and earnings, technical analysis focuses on price, volume and trends. Technical analysis is usually used for short-term trading and various kinds of chart analysis, and it is also used to evaluate an asset within the context of the overall market it belongs to.
The core of technical analysis is predicting future price movements by analyzing past data. It can be used to analyze almost anything that can be traded, including stocks, futures, commodities, currencies and securities.
Technical Analysis Basics
Charles Dow, the father of technical analysis, is known to have laid its foundations through Dow Theory. Dow also published educational materials on technical analysis. Its key ideas can be summarized as follows.
- Markets are efficient and reflect the factors that affect asset prices.
- Price movements that occur within patterns and trends we can identify tend to repeat.
In this way, technical analysis assumes that all publicly known information is already reflected in the market price, and it generates trading signals by analyzing price movement patterns and trends.
Since Charles Dow, many technical analysis tools have been introduced. Technical analysis generally shares the following three principles.
- The market discounts everything. Everything, from a company's fundamentals to market sentiment, is already reflected in the price.
- Prices move in trends. Prices generally follow the existing trend.
- History repeats itself. Technical analysis has been used for more than 100 years, and it remains valid because chart patterns, market psychology and price movements repeat in similar forms.
How to Use Technical Analysis
Technical analysis can be used to predict the price movements of almost any asset that can be traded.
Commonly used technical indicators include trendlines, channels, moving averages and momentum indicators. These are used to identify resistance and support levels within the current trend, and through them you can also judge the strength of a trend and whether it is likely to continue.
Technical analysts combine several technical indicators, and they usually consider the following together.
- Price trends
- Chart patterns
- Volume and momentum indicators
- Oscillators
- Moving averages
- Resistance and support levels
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Limitations of Technical Analysis
However, technical analysis has its limitations. Because it is based on past data, it cannot predict unexpected events such as black swans.
You should also keep in mind that these are lagging indicators: they do not determine market prices, they only try to predict them.
Above all, even when people use the same technical analysis, their judgments can all differ, and sometimes false signals are generated. So you need to test a lot and build experience through it, and above all, you should use technical analysis together with fundamental analysis while taking market conditions into account.
