During the analyses, you can often see all kinds of charts and diagrams from which they "predict" or just analyze what happened. In this regard, we have collected a few things for you to pay attention to when looking at these charts.

What are candles?

A candlestick is a type of price chart used in technical analysis that displays the high, low, and opening and closing prices of an asset for a given time period.

This method originated with Japanese rice traders who used it to track market prices and daily movements hundreds of years before it became popular in the United States.

The wide part of the candle is called the "real body". This shows traders where the price opened and closed within a given time period. And the wicks of the candle show the maximum and minimum price within the given period.

Source: Investopedia

Candles reflect the impact of investor sentiment on asset prices and are used by technical analysts to determine when to enter or exit trades. Candles can be used for any liquid financial instrument, such as stocks, currencies and futures.

Long green candles indicate strong buying pressure, meaning the price is rising. However, they should be examined in the context of the market structure, not individually. For example, a long green candle is likely to have more significance if it forms at a significant price support level. Long red candles, on the other hand, indicate significant selling pressure. This suggests that the price is falling.

By observing these candles, we can see trading patterns in the long or short term, which are used in the analysis.

The movements of Bitcoin in 2021. Source: trandingview.com

What is technical analysis?

Technical analysis, in short, is a trading discipline used to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement or volume.

Unlike fundamental analysis, technical analysis focuses on the study of price and volume. Technical analysis is often used to generate short-term trading signals, but it can also help assess the strength or weakness of an asset relative to the market. Information from the analysis helps analysts improve their overall valuation estimate.

Technical analysis as we know it today was founded by Charles Dow and the Dow Theory in the late 1800s. Today, technical analysis includes hundreds of patterns and signals developed over years of research.

Technical analysis is based on the assumption that past trading activity and price changes of an asset can be indicators of the future movement of the asset's price. So, it attempts to predict the price movement of any trading instrument that is subject to the forces of supply and demand, including stocks, bonds, futures, and currency pairs.

In fact, some view technical analysis simply as the study of supply and demand forces as reflected in the movement of an asset's market price. Technical analysis is most often concerned with price movements, but some analysts track numbers other than prices, such as trading volume.

Forms and market signals

There are hundreds of patterns and signals in the industry that have been developed by researchers to support trading with technical analysis. Some indicators primarily attempt to identify the market trend, such as support and resistance areas, while other indicators show the strength of the trend and the likelihood of its continuation. Commonly used indicators and chart patterns include trend lines, channels, moving averages, and momentum indicators.

A few examples of frequently used indicators:

Price trends

Chart samples

Volume and momentum indicators

Oscillators

Moving averages

Support and resistance levels

Limitations of technical analysis

A common criticism of technical analysis is that history does not exactly repeat itself, so the examination of the price pattern is of dubious importance and can be ignored.

His other criticism is that it only works in certain cases, but only because it has a self-fulfilling effect. For example, when a trader places a stop-loss order below the 200-day moving average of the price of a certain asset. If many traders have done this and the stock reaches this price, there will be a large number of sell orders that will push the price down, confirming the move traders expect.

Of course, knowledge of technical analysis offers its users an advantage in the market and is often used by professional analysts in conjunction with other forms of research.

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