Technical Analysis in Trading for Beginner’s: Guidance 2022

Technical Analysis in Trading

Technical Analysis in Trading –

Get to know Technical Analysis in Trading – There are two types of analysis that must be mastered by traders, namely technical analysis and fundamental analysis. If fundamental analysis varies depending on the type of asset, then technical analysis tends to have similarities between one type of asset and another.

Read More

Fundamental analysis is generally used by investors or traders who want to trade in the long term while technical analysis can be used for both short-term and long-term trading.

But, what exactly is technical analysis and why is it so important in trading? Check out the following review.

Definition of Technical Analysis

Technical analysis is the analysis used by a trader and investor to predict future price movements of an asset. This analysis utilizes historical data on asset prices and operates on the assumption that price movements in the market are perfect.

Perfect here means that there are no things that make the price of an asset differ too much from the actual valuation of the asset, such as information inequality (asymmetric information), insider trading, force majeure (such as Covid-19) and so on.

Components of Technical Analysis

There are several important components that must be present in a technical analysis. The components are:

1. Asset price

The price of an asset is the main object of analysis of a technical analysis. The price here includes the price of the asset in the past and present to estimate the price in the future.

The price of an asset is formed from the amount of demand and supply in the market for an asset and moves according to the demand and supply trend.

2. Graphics

A graph is a visual display of a variable. In this analysis technique, the chart can be a visual display of the price movement of an asset or a visual display of the movement of the technical indicators used by traders.

Charts or price curves can be displayed in many forms ranging from line charts (line chart) to the candlestick chart (candlestick). In contrast to price charts, usually indicator charts can only be displayed in the form of lines.

3. Technical indicators

Technical indicators are a set of mathematical and statistical formulas used to forecast future price movements. Currently, traders and investors do not need to manually analyze technical indicators. Trading application and artificial intelligence in it will help analyze and display the results of the analysis in graphical form.

4. Time

Timing is an important component in technical analysis especially for forex commodities. This is because forex exchange rates can change quickly. Therefore, in order to produce accurate technical analysis results, traders are required to analyze the historical price movement of an asset over a certain period of time.

5. A trader’s decision

A trader’s decision is an important factor in a technical analysis because the purpose of technical analysis of the price of an asset is to help traders form rational decisions according to the available data. The decision here can be divided into two, namely opening a sell or buy position and the decision to wait (wait and see).

A successful trader is a trader who can place his trading decisions at the right place and time. This exact place and time is determined by technical analysis.

The Purpose of Studying Technical Analysis

Technical analysis is important for estimating the future price of an asset. It is this forecast of future asset price movements that will affect a trader’s decision whether to buy or sell the related asset.

With this analysis, every trading decision taken by an investor or trader is not only based on emotions or assumptions but also based on data.

Another benefit of buying an asset based on technical analysis and not based on emotions and assumptions is that it minimizes risk. Risk here can mean financial risk due to loss of trading capital as well as mental risk due to losing a certain amount of money.

It is no secret that the main similarity between trading and gambling is their potential for addiction. The existence of technical analysis in trading is what distinguishes trading from gambling so that the effects of addiction and other emotional effects related to games that feel profitable can be minimized.

Steps to Perform Technical Analysis

According to Salim (2011) in his book entitled “Practical Guide to Playing Forex Through the Internet”, there are at least 5 practical steps for conducting technical analysis. The 5 steps are:

  1. Reading charts. As noted above, charts are a representation of price movements. Therefore, it is important for a trader to be able to read a chart.
  2. Reading trends. The main assumption of technical analysis is that the price of an asset in a certain period of time must move to form a certain pattern and continue to repeat over time. This price movement is in accordance with the trend of market sentiment whether it is up, down or even sideways.
  3. Knowing support and resistance. The support line is a line that connects the lowest price points of an asset in a certain time period while the resistance line connects the highest price points. These two lines are important to understand so that traders know when to buy, when to sell and when to wait.
  4. Understanding overbought and oversold. Overbought and oversold is the point at which the price of an asset has the potential to experience a trend reversal (reversal) whether it reverses to increase (oversold) or down (overbought).
  5. Understand and apply technical indicators. Technical indicators are a set of mathematical and statistical formulas used to forecast future price movements. In the world of trading, there are hundreds of technical indicators that traders can use. These include some basic technical indicators such as, moving average, bollinger bands, relative strength index (RSI), stochastic indicator and so forth. These indicators are useful to assist investors in making decisions to sell, buy or wait. Therefore, it is important for an investor to understand these technical indicators.

Another step that is no less important in conducting technical analysis is preparation and planning trading plan and evaluation of implementation trading plan the. This evaluation is important to maintain consistency of trading results obtained by traders.

When Should Technical Analysis Be Used?

In the explanation above it is clear that one of the benefits of technical analysis is to determine when to sell and when to buy (entry and exit points). Therefore, it is recommended that this analysis be carried out before a trader sells and buys a particular asset.

Well, this particular type or brand of assets will be determined by a combination of technical and fundamental analysis results. Thus, this analysis should also be carried out after the trader has finished analyzing the desired fundamental condition of the asset.

Conclusion

Technical analysis is an analysis used to estimate asset price movements based on the previous history of the asset’s price. The main benefit of this analysis is that it helps traders determine entry and exit points.

Related posts