Technical analysis is the forecasting of future market prices, based upon charts representing historical price movements. Trades using technical analysis examine the history of market prices and the turnover of relevant financial instruments in order to identify the market trend and its possible changes.
Charts representing historical prices reveal various shapes and formations, traders using technical analysis methods claim that the formations occur on a regular basis and lead to similar market behaviors - continuation or change of the market trend. Unlike fundamental analysis, which evaluates overall market situation, technical analysis may be used to define the moment of entering and closing the market position.
Technical analysis is based on the following assumptions:
- Market discounts everything - all the factors that have influence on the price are already discounted. It comes from the supposition that prices reflect changes in relation to supply and demand.
- Prices are subject to trends – a technical analyst tries to discover a trend (actual direction in which prices follow) by analyzing the historical prices charts. Identification of the trend in its early stage of development may lead to profitable transactions.
- History repeats itself – by studying the charts one can recognize repeatable formations drawn by the prices. It is a consequence of recurring human behaviors in specific situations. Analysts attempt to identify the price formations in the current market behavior and upon this basis forecast the future price movements.