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What is Technical Analysis?

When analyzing assets or making investment decisions, two types of analysis can be used: Fundamental Analysis and Technical Analysis. Fundamental Analysis can involve carrying out an analysis of an asset or of the characteristics of a company to estimate its “Value.” Technical Analysis is completely different, it does not matter the “value” of an asset or a company, the only thing that matters is the movement of the market price.

Although there are many different instruments to carry out a technical analysis, this type of analysis focuses, basically, on the study of the supply and demand of an asset in a given market, in order to determine the direction or trend that will take in the future.

So what is Technical Analysis?

It is an analysis method that consists of evaluating assets through the information that the market itself provides such as price and volume. Technical analysis focuses on charts and other tools to identify patterns that allow estimating future movements.

There are different types of technical analysts, some only focus on reading the chart, others use indicators or oscillators and others do a combination of both.

Technical analysis is based on three key concepts:

  • 1. The market discounts everything.
  • 2. The price moves in trends.
  • 3. History often repeats itself.

The market discounts everything

Technical Analysis assumes that at a given moment, the price of an asset reflects everything that may be affecting said asset (including fundamental factors).

Technical analysts consider that all the concepts of fundamental analysis of an asset such as economic factors, news or market psychology are already within the price of that asset.

The price moves in trends

In the Technical Analysis it is considered that prices move following trends. This means that once a trend is established, it is more likely that the price will continue in that trend than for a change to occur.

There are many trading systems that are based on this concept.

History often repeats itself

Another important concept in Technical Analysis is that it considers that history tends to repeat itself, in terms of price movement.

This repetitive nature of the price movement is attributed to market psychology and what it means is that market participants tend to react in a similar way to the same stimulus even if it occurs at different times. Technical analysts use patterns to analyze market movements and understand trends.

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