A way to analyze the markets other than fundamental analysis is technical analysis. In this lesson, we shall exactly understand what technical analysis is, and also the different techniques to analyze the market using technical analysis.
What Is Technical Analysis?
In simple terms, technical analysis can be defined as the study of price movements.
Unlike fundamental analysis, where people study the factors which affect the supply and demand of the market, technical analysis involves the study of the historical price movements and the present market condition.
Why should Technical Analysis be used?
Let us answer this question by bringing up an analogy.
The first thing one must understand about the market is that the forex market business is no different from a real-life business.
For instance, let’s say there’s a car dealer and they have been selling one particular car for six months by varying the prices every month. And an illustration of the sales report is given below.
Now, from the above table, can you predict what could be priced in the near future? If yes, then you can consider yourself as a technical analyst, as this is what technical analysts do.
Consider the above table. We can see that initially, the car was priced at $20,000, and 9,000 units of the car were sold. Next month, the owner price reduced by $1,000, and the sales increased by 1,000 units. Seeing this demand in the car, the owner increases the price to $25,000. But, this time the sales drop down to 1,000 units. So, the car owner reduces the price back to $19,000. And he observes that the sales increase from 1,000 to 10,000. Later, he again raises the price to $26,000.
Now, by analyzing the past price movements, we can predict with a high probability that the price will reduce yet again, as the previous time the price came to $25,000, the price dropped drastically. Thus, looking at the price of the car in June, we can see that the price did fall to $15,000.
Therefore, the above example, in a nutshell, is referred to as Technical Analysis.
Switching back to the Forex market, the analysis is done similarly. The only difference being the Forex market involves the trading of currency pairs, and the real market consists of the buying and selling of products.
Hence, from this, we can conclude that a market moves as per the historical price movements. The above example is just to give you a gist of how technical analysis work. There are many more complex ways to accurately predict the market using technical analysis. Price Action traders do their technical analysis using different types of charts (like candlesticks, bars, lines, area, etc.), timeframes, and indicators.
Hence, this brings us to the end of this lesson. In the lessons coming forward, we shall be discussing tons of stuff related to technical analysis. So, stay tuned.