Technical analysis, what does it mean? Anyone who is starting to get interested in the world of capital market trading gets to the phrase “technical analysis” very quickly, it’s a bit difficult at first to understand what it’s for and so we’ll start with the commentary from Wikipedia:
Technical analysis is a method of analyzing trends in the value of financial assets traded in public trading at the level of the specific asset or even a group of assets of the same type. People who engage in technical analysis are called “technical surgeons” or “technicians” for short. The technical analyst plots the prices of the assets he analyzes on graphs, to identify trends and patterns that will allow him to predict future market movements. Wikipedia.
Try to focus for a moment on this line: “To identify trends and patterns.” And if it is possible to be even more focused, let’s focus on the word “patterns”.
We suggest interpreting the words technical analysis as patterns of behavior, why? For the same reason, that technical analysis has been working and has been used for decades and the main principles of technical analysis (according to Dow’s theory there are 6 main principles) have not changed.
But wait, how does it make sense that the same technical analysis that worked 100 years ago is still relevant today? After all, the whole world has advanced, technology, globalization, the Internet, etc., all of these have brought many changes to the world of trade and investment and yet, the technical analysis remains the same, why?
Because when we do technical analysis of the stock, we do not analyze the company itself, not its financial statements and certainly not the balance sheets, but only the chart of that stock, and sometimes, traders buy or sell a stock that they do not even know what the company is doing. And all this is only “because” of the technical analysis.
That is, we have reached our definition of technical analysis, so technical analysis is, by the way, the ratio tested in the past regarding joy over profit versus sadness from loss is more than 3 times, that is, if you were to end a trading day at a profit of $ 500 you would be happy and happy X and if you were to finish a day Trading at a loss of $ 500 you were sad X3, so once we understand that stock prices are moving because of supply and demand of people, we can try (and the emphasis here is to try) to perform technical analysis on the chart and think what the action patterns of those traders and investors are in stock Which we analyze.
Let’s practice technical analysis for example and you will see how traders can make a decision based only on the patterns of action of most people, say we have two traders, trader A and trader B. Trader A has decided to buy the Y share, the Y share price stands at $ 100, after Trader A bought the Y share the stock has dropped from $ 100 to a price of $ 50, now, Trader A is upset, sore and nervous, he is losing 50% on his deal And to return to its entry price, the stock must now rise 100%, Trader A decides that at the moment he does not want to sell the Y share at a loss b_ecause it is not a real loss he claims, but only a loss “on paper” and therefore Trader A continues to hold the Y share And hope for the best.
Now, Trader B sees the Y stock and he sees that the stock was previously traded for $ 100 he estimates it is expected to rise and return to trading at that price, so Trader B buys the Y stock.
After 3 months of waiting, the Y share price came back to $ 100, Trader A who is so happy with his decision not to sell the Y stock feels he made the right decision and now that he is no longer at a loss, he decides to sell the stock, albeit not at a profit But at least not at a loss, certainly not at a 50% loss.
Now, Trader B, thinks to himself that the Y stock has made a significant upward move and after the stock has reached a price of $ 100 people who have invested in the stock in the past will probably take advantage of the situation to get out of it, he estimates there will be gains in the Y stock. Of 100%.
A new character enters the picture, Trader C, Trader C is a skilled trader and he knows that there are a lot of A traders and a lot of B traders in the world therefore he estimates that Y share is likely to fall because of trader A and B and performs the short trade, and lo, three different people, all driven by different emotions, greed, fear, etc., make a decision based on the chart of the stock, which is gentlemen, technical analysis on one leg.
By the way, in favor of the extremism of the example, none of the three traders know what Company Y is dealing with.
Finally, this technical analysis is to try to predict the next move of a stock using its chart, so the next time you look at a stock chart try to get into the head of the person holding the stock, try to think about what points on the chart Traders A will decide to sell, at what point ‘They will decide to sell and you may try to be a third party trader yourself.
Of course, there are many more examples and other ways to perform technical analysis, but this is one example that illustrates the general idea, and it is important to note that the technical analysis does not always work, then if it was that simple and easy, everyone would do it.
See you in the next article.