When you decide to rely on a methodology to make a decision, it is very important to understand its origins and, of course, its strengths and weaknesses. This is the case in all areas, but it is even truer in the field of finance and the stock market, because each bad decision comes at a high price. If you are a beginner trader, it is therefore essential to understand how Stock Technical Analysis In Australia works before relying on it to make your stock market forecasts and place your trades.
Technical Analysis, What Is It?
This is an analysis method based on the study of the price of an asset and the indicators derived from it, the objective obviously being to deduce its evolution in order to take a position. This method of analyzing an asset is opposed to fundamental analysis, which consists of analyzing the economic and accounting data of a company and the sector of activity in which it operates in order to know its financial health and to possibly forecast its stock market performance.
The main tool of the technical analyst is the chart and the technical indicators derived from it. Technical analysis is a methodology that aims to predict trends and trend reversals. If it can be particularly effective in certain types of trading, it is not an exact science, like all predictive sciences for that matter. It should therefore be used wisely and knowingly.
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The Origins of Technical Analysis
The pioneers in the field of technical analysis remain unquestionably the Japanese: as early as the 18th century, they discovered that the markets were greatly influenced by the psychology of sellers and buyers. At the time, their observation was based solely on the price of rice. But it was not until the end of the 19th century that the letters of nobility of technical analysis were written by Charles Dow, Ralph N. Elliott and William D. Gann. They are each at the origin of theories that have given rise to different ways of understanding technical analysis.
The Dow Theory: 3-Step Trading
Charles Dow identifies three major trends in the price of a listed asset, each contained within the previous trend.
The primary trend: up or down, lasts at least a year. The secondary trend: lasts from one to three months and corresponds to a phase of correction of the primary trend. The tertiary tendency: less important, it lasts a maximum of a few weeks and is contained in the secondary tendency.
Elliott Waves: A Vague Theory?
Ralph N. Elliott has shown that the evolution of a course is in the form of a series of bearish or bullish waves. This observation is valid regardless of the unit of time chosen. He has built a whole theory, called "wave theory", which breaks down the evolution of the price of an asset, into 8 different "waves", of more or less important intensity and frequency (usually noted 1, 2, 3, 4, 5, a, b, c on the graphs). In decreasing order of intensity, we find the "Super cycles", the "Cycles", the "Primary", the "Intermediate", the "Minor", the "Minute" and the "Minute".
The Gann Theory: A Story of Angles
According to William D. Gann, the price of an asset changes by one unit of value for one unit of time, or graphically along an axis at 45°. However during its evolution, the price will follow oscillations which will bring it to rub against resistances or supports which are defined in Gann's theory by different straight lines drawn according to the following angles: 82.5°, 75°, 71.25°, 63.75°, 45°, 26.25°, 18.75°, 15° and 7.5°.
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The Fundamentals of Technical Analysis
The methodology of technical analysis is based on 3 assumptions.
The Price of an Asset Integrates All the Information
If we consider that at any time the price of an asset immediately takes into account all available information, both economic (macro and micro) and economic (international policies, etc.), then the study of the data contained in prices (volume, price) is enough since it is no longer possible to benefit from an announcement effect.
The Price Evolves In Trend
Technical analysis is limited to applying the psychology of crowds to financial markets. In this sense, the market can be in an optimistic dynamic (rising phase) or in a pessimistic dynamic (falling phase), or in a phase of hesitation (range).
The Story Repeats Itself
The study of market history shows that the same mistakes are repeated, which tends to show that "the markets do not learn". If the individual can learn from the past, the crowd does not learn from it and will often evolve in the same way in identical situations. The parallelism can be made with the financial markets.
Why Is Technical Analysis Popular With Amateur Traders?
The main reason lies in the accessibility of the information necessary to implement a technical analysis. Indeed, to make a technical analysis on the price of an asset, it is enough to have a history over a sufficient time horizon (relative to the horizon on which one seeks to make the prediction). To carry out the same type of analysis with a fundamental approach, it is necessary to have much more information, which is sometimes very difficult to obtain, and part of which must often be purchased (particularly sector analyses). Fundamental analysis therefore costs time and money compared to technical analysis. It is for this reason that many amateur traders, who do not have economic data flows and do not have the time or inclination to analyze the context of a listed company, prefer to make their decisions on the based on technical analysis.
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