Technical analysis was first used by the Japanese in the eighteenth century to predict the price of rice.They understood that the rice market was influenced by the emotions of the people involved in the transaction and that the representation of the harvest could be quite different from the crop itself.Subsequently, different market analysis tools through graphics have been developed in the United States and Europe to allow the underlying analysis of an asset. Even if it is criticized, this method of empirical analysis involved in the daily decision making numerous professional stock market .
Anticipate market trends through charts
Technical analysis is the study of the stock market and its indicators through graphs to predict market trends.
indices, commodities, currencies, etc., all types of markets can be analyzed using the tools and methods of technical analysis, formerly known graphical analysis. The only indispensable element and the asset in question is determined by supply and demand .
The main objective of this type of analysis is to predict future trends on the stock markets. Technical analysts are tasked to identify the conditions of different markets giving similar statistical results. In other words, they consider that the stock exchanges are largely influenced by the psychological dimension and seek to identify the behaviors that are repeated, in order to predict future changes in assets.
Above all based on the psychology of the market, the Technical analysis is not an exact science. Its methodology is more akin to those of the human sciences.
The market contains all the underlying information
Graphical analysis operates on three axioms. The main axiom believes that “the market takes everything into account.” This is important in this method because it justifies the fact that the analyst takes into account all the market data and set aside the fundamental factors, such as the company’s growth and its governance , for example. Since this principle states that the market already incorporates all the underlying data, it is not necessary to examine the contextual factors.
The trends of the stock market are repeated
The second axiom considers that the market is still experiencing similar trends. It is possible to observe through historical charts. The analyst can observe periods of increases and decreases time periods on a more or less long. The analysis explains that this does not happen by chance, relying on psychology. The idea being that the crowd, as the market may be optimistic, pessimistic or be uncertain. These periods can be observed on a chart. As the crowd, prices are rising, falling, or are stagnant.
As the crowd, the market is decisive
Always based on analysis of crowd psychology, technical analysis is to assume that the “errors” of the market will be repeated. The past determines the future. The idea is rooted in sociological theories that the crowd behavior of its own and which exceed the sum of individual behavior. When a person make a decision within a crowd, the person is under the influence of what she imagines to be the decision of all individuals, that is to say from the crowd . The individual can decide out of the crowd, but this will not affect the behavior of the latter. Therefore knows the market, according to technical analysts, behaviors that are specific and exceeds the behavior of each asset. Each asset being influenced by the behavior of the market, while the market itself can not be influenced by the assets.Here’s an example, speculative bubbles and crashes are repeated in the history of the markets. This one does not learn from past experiences.
Criticism by fundamental analysis
Technical analysis is most often considered a “practical approach to trading,” than a science in itself.The fact that market professionals use it in their daily work gives still some credit.
Technical analysis is not unanimous among financial analysts. It is for example widely criticized by proponents of fundamental analysis. The latter is in total disagreement on the factors that determine the evolution of stock markets. Fundamental analysis takes into account the quantitative and qualitative factors in the market in order to highlight the intrinsic value of an asset. The approach does seem opposite but it also gives relatively good results.