Technical Analysis
Alongside fundamental analysis, technical analysis is the other most important method for predicting exchange rate direction. Technical analysis uses chart analysis to understand past price fluctuations and the market behavior associated with them, and thus predicts future exchange rate trends. A chart is simply a graphical representation of past price changes, but it has tremendous power in predicting exchange rates. This is because charts do not merely present exchange rate trends graphically; they also reflect and display human psychology to a significant degree. By grasping market participants' psychology and using it to make quick trading decisions, investors can increase their opportunities for profit.
Characteristics of Technical Analysis
Price reflects everything in the market.
Stocks and exchange rates can be influenced by all factors, including economic, political, and psychological ones. Therefore, understanding price movement requires considering all these factors.
Prices follow trends.
Most technical analysts believe that a trend inherently exists, so they identify past trends and predict future prices. If one does not believe that such a trend—that is, that price movement has a direction—exists, technical analysis has no meaning.
Prices repeat historically.
A large part of studying price movement consists of studying human psychology. Patterns formed over a long period in the past make it possible to predict that similar effects will occur in the future, because history repeats itself.
Types of Technical Analysis
Trend Analysis
In general, once prices begin to ride a trend, that trend tends to persist for a considerable period. A technical analysis method that uses this property is called trend analysis.
Pattern Analysis
As trends change, prices sometimes form patterns. Pattern analysis is a method that analyzes these patterns, compares them with actual price movements, and predicts future trends.
Market Condition (Market Strength) Analysis
This method uses auxiliary indicators to determine whether current stock prices or exchange rates are in overbought or oversold territory, and identifies buying and selling zones. It mainly employs technical indicators such as moving averages, MACD, RSI, and Stochastic.
Psychological Analysis
This is a somewhat different form of analysis from conventional methods. It is used to understand market participants' psychology and enter positions opposite to it. For example, when many investors hold long positions, traders who take short positions in the opposite direction—engaging in somewhat higher-risk trading—mainly use it.
Market Structure Analysis
This method predicts prices by observing and studying market movements over a long period to understand the principles behind market fluctuations. A representative method is the Elliott Wave Theory.
Limitations of Technical Analysis
Even when looking at the same chart, investors produce different interpretations through their own analysis methods. This is generally because people tend to interpret things in their favor, and it is not easy to look at and analyze the market from a 100% objective perspective.
It is also true that some people are skeptical of technical analysis, such as those who follow the Random Walk Theory, which argues that because actual price movements depend on market participants, predicting them is impossible. However, as many successful investors maintain that technical analysis is a highly valuable investment tool, one should not dismiss it simply because of a negative attitude.
Reference Links
Topics: stocks,stock indicators,Pattern Finding
Category: Wiki/Economy