Technical analysis or also called Chartism, is an analysis model focused on predicting the (future) behavior of the market based on price and volume data. In short, TA studies the current and previous prices of an asset.
It is very important to know that the price of an asset is the reflection of the opposition of buying and selling forces, related to the emotions of traders and investors (either by any circumstance but one of them can be fear).
Traders to analyze prices and identify possible entry or exit opportunities use different tools called indicators, which can help traders to see trends and provide very relevant information about them for the future. This is not to say that these technical analysis indicators are 100% reliable or without any margin of error, no, that is why there are traders who combine indicators in order to reduce the risk of loss.
AT Indicators
Below I will show you some indicators that are generally the most common:
Moving averages: one of the main indicators used by most traders are moving averages, as they are basic and simple to analyze. It measures price trend changes at the close of the asset, it has the advantage that it measures the strength of a trend in the long term but does not anticipate the start or change of trend.
Types of moving averages:
Simple Moving Average (SMA): one of the most widely used and known to all, it is calculated based on the closing prices of an asset over the course of a given period of time. It is the sum of a set of prices divided by the number "n" of these.
Weighted moving average: It is calculated similarly to the simple moving average, but the formula gives more weight to the most recent prices of the asset with respect to the oldest ones.
Exponential moving average (EMA): This is a modified version of the SMA, which weights the recent closing prices much more heavily than the older ones, i.e., it gives a higher value to the newer data, compared to the weighted one.
Moving average convergence/divergence (MACD): This is generated by the subtraction of two EMAs that give rise to a main line, that is, the MACD line.
Relative Strength Index (RSI): This indicator is also widely used by traders and is part of the indicators known as: Oscillators, which apply data on prices, mathematical formulas and produce readings that will be between defined ranges and is then that RSI the range ranges from 0 to 100, plus it is very good for measuring the behavior of demand and supply of a value when there are sudden changes in asset prices.
Stochastic RSI: It is calculated by applying a mathematical formula to the regular RSI. We also have the MACD histogram, which is calculated based on the differences between both lines.
Bollinger Bands (BB): It is also an oscillator type that is quite well known among traders and it consists of two sideways bands that fluctuate around the line of a moving average. It is used to identify potential market conditions (overbought or oversold) and to measure market volatility.
Technical analysis is extremely important to develop your performance as a trader, knowing that the price of an asset is a reflection of the opposition of buying and selling forces will help you reduce the risk of losing funds. Remember that when trading it is extremely important to avoid these losses.
Written by: Luzzu.
