GBP/CHF 1.23411 20:30 20.07 AUD/USD 0.79552 19:45 20.07 AUD/USD 0.79609 19:00 20.07 EUR/USD 1.16198 18:45 20.07 EUR/USD 1.16268 18:30 20.07 AUD/USD 0.79610 18:15 20.07 EUR/USD 1.16248 18:15 20.07 EUR/USD 1.16292 18:00 20.07 EUR/USD 1.16344 15:15 20.07 USD/JPY 111.750 15:00 20.07 EUR/USD 1.16328 14:45 20.07 USD/JPY 111.735 14:45 20.07 EUR/USD 1.15510 13:15 20.07 GBP/USD 1.29469 11:15 20.07 GOLD 1236.953 11:00 20.07 GBP/USD 1.29417 11:00 20.07 GBP/USD 1.29558 10:30 20.07 GBP/USD 1.29652 10:00 20.07 GBP/USD 1.29696 09:45 20.07 DUBAI 3561.670 08:10 20.07 GBP/JPY 145.821 03:00 20.07 EUR/USD 1.15232 03:00 20.07 HANG SENG 26713.230 03:00 20.07 NZD/JPY 82.322 01:00 20.07 EUR/USD 1.15231 01:00 20.07 BHP-AU 24.925 01:00 20.07 USD/JPY 111.982 21:00 19.07 USD/JPY 111.837 20:30 19.07 AUD/USD 0.79563 20:00 19.07 AUD/USD 0.79571 19:45 19.07

Technical Analysis

Technical analysis is the study of price action as reflected on charts of a market, asset class, or underlying instrument and the study of various indicators of derived classes (underlying) in order to anticipate the evolution, and subsequent direction of markets and the specific asset which you are trading.

This graphical extrapolation applies to all types of markets: indexes, equities, fixed income, commodities, options, futures, etc. It is not limited to equity markets; the same tools and methods that are mastered can then be applied to any (other) type of underlying asset when its price is determined by the meeting of supply and demand.

The main tool of the technical analyst is the graph that allows the visualization and analysis of an underlying asset.

Regardless of the fundamentals, regardless of whatever may be occurring in the market now or in the future, the graphical chart reflects exactly what is happening at any specific moment in time.

Hence, successful trading ultimately boils down to your ability to ‘see’ – trading is a visual acuity, your ability to recognize repetitive chart patterns and to act, to execute instantly upon recognition of a trend reversal pattern, recognition of support, resistance, retraces, pull backs, etc.

The objective, the goal and purpose of trading, and therefore technical analysis is the ability to correctly forecast or recognize trends, and if possible, the signs of trend reversals. It involves identifying market conditions that give statistically identical, repetitive results; at least to a statistical probability of a minimum of 70%. 85% is preferable and attainable.
Technical analysis does not purport to be an exact science. It is closer to a human science as its object of study is directly focused on understanding the psychology of the market and how human nature does have waves, bio rhythms, repetitive patterns and behavior, for example, the Fibonacci retracement tool is based on absolute mathematical patterns in nature and thus, human nature.

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History

The Japanese were the first to use technical analysis to make financial trading on one of the oldest futures markets in the world, namely rice. The Japanese began to address this market in the seventeenth century. At this time, it happened that the future harvest of rice was sold in advance (futures). These futures contracts were called empty rice contracts. This is the origin of the futures market which generated a strong speculation that gave birth itself to the Japanese technical analysis.

Munehisa Homma (1724-1803) discovered that the markets were influenced by psychology and emotions of the individuals involved in the trading. The perception of crops and their harvest could well be very different from the reality of crops produced and brought to market. Expressed differently, Homma realized that the price and value of property were two separate concepts. Homma could be at the origin of the Japanese candlestick which seems to have emerged in the late nineteenth century Japan in the Meiji era. The candlestick charting technique is largely ignored in the eyes of the West until 1990 when Steve Nison unveils his research and findings after a business trip to Japan.

In Europe, some caricatures of the nineteenth century showed speculators studying historical charts well before any theory of this kind of study. Jesse Livermore, whose market adventure is recounted in the memoirs of a speculator makes decisions on simple considerations of markets and not on fundamentals. By studying the psychology of the market on the basis of his personal experience, he discovers similarities in certain situations that allow him to predict reversals of trends. In this can be seen as a precursor of technical analysis.

But it was in the late nineteenth century that the first major theories: The Dow Theory by Charles Dow, the theory of Elliott wave Ralph N. Elliott and the theory of Gann angles by William D. Gann started to be accepted more as proven methodologies of accurate prediction than theory. Each of these theories pose hypotheses “philosophical” or esoteric, from which various schools of technical analysis are built.

In the early 1990s that technical analysts are starting to publish books and articles and popularize their application and management. Some of these publications are descended from the work of the founding fathers, while others bring their own contributions to the theory by creating new tools such as oscillators.

The most famous modern theorists such as Prechter supplemented and explained the theory of Elliott Waves; Steve Nison who advocates the use of Japanese candlesticks; Wilder who developed the RSI (Relative Strength Index), and the bounded oscillator that paved the way a more quantitative technical analysis to have information on the extent and strength of a price movement.
“The hunter of market trends,” Charles K. Langford, Quebecor 2006 and Stan Weinstein have also greatly influenced the trading techniques used by technical analysts, revealing a technique based on four phases that allowed them to pass through large stock market crash. It is the origin of the famous slogan “the tape tells all” which means “the course says it all.” In other words, all relevant information is recorded in the share price.

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Three Fundamental Principles

There are Three Fundamental Principles that constitute the foundation of technical analysis.

Following these principals is critical to trading success regardless of trading methodology.

The Market Takes Everything Into Account.

This axiom is certainly the most important of all 3 because it justifies the fact that technical analysis is only interested in current, at the moment, market data and not to fundamentals such as economic statistics and business results. Indeed, if, at any moment, the price of an underlying asset immediately incorporates all available information on the markets, then there is no need to focus on the fundamentals as it is almost impossible to enjoy an announcement effect.

Markets Follow Trends

It is the observation of historical price charts which gives the technical analyst the market trends. The study of a stock chart identifies phases, increases and decreases in phases over periods ranging from minutes to years. To explain this phenomenon is not just due to chance, technical analysis is based on the psychological analysis of crowds. Market, as a crowd, can be taken either in a dynamic optimism (or euphoria), or in a dynamic pessimism (or despair), and in a hesitation phase. This is reflected in a graph by periods of rising, falling or sideways or stagnant prices; times we will identify respectively as uptrend, as downtrend, and as range.

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Market History Repeats

There is a popular, almost famous disclaimer on all financial corporate sites, including ours – that past performance isn’t indicative of the present or future – words to that effect. Here’s the truth – the future is determined by the past market and the same “mistakes” always repeat (formation of speculative bubbles and crashes).

Again, this idea stems from the psychological analysis of a crowd. Sociologists who are interested in crowds claim that they have identified specific behaviors having no link with a simple sum of individual behaviors. A crowd is driven by certain principles that manage to transcend the psychology of the individual component. Everything will have more influence on the part that each party will have in the least because of the phenomenon of imitation existing within any group.

The decision of an individual in a crowd is based on the idea that it is the decision that will persuade the other individuals in the crowd and not the normal perception of reality. This applies to markets that crash and speculative bubbles which are recurring; these are the best examples of the existence of the principle of imitation, which prohibits any lesson from the past to the crowd.

Laws or principles or repetitive patterns are to be noticed by technical analysts and then to attempt to take advantage of the recurring phenomena; techies know that there are no absolutes and that they usually employ several confirming scenarios before a decision, rather than take action on one technical factor.

As a trader, you should consider technical analysis as a practical approach to trading than as a perfect science and know that in order to execute winning trades, you will always have losing trades. No one trades at 100% no matter how experienced and skilled they may be.

The strength of technical analysis which can lead many to consider it as a science (social and not hard) is that it is produced and continually used by traders who have a daily and pragmatic view of the markets and continually behave in predictable patterns, proving the efficacy of this approach to the markets.

A famous quote with respect to technical analysis is that of George Lanes:

“The trend is your friend” – this sentence sums up the advantages of technical analysis.

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