Technical analysis refers to a very varied set of rules, techniques and principles. We can distinguish two sub-disciplines in technical analysis: chartism and “mathematical” analysis, which concerns indicators such as bear flag pattern or bull flag pattern.
Chartism (or graphical analysis)
Chartist analysis is the heart of technical analysis. Experienced traders find charting to be often more reliable, efficient and useful than indicators.
The advantage of chartism is its simplicity: It is indeed very easy to master the basics of graphical analysis, and then everything is a matter of experience.
According to experts, the value of chartist analysis lies in the fact that it looks at the “raw material”, i.e. directly at the price movement on the charts, unlike indicators, which pass this raw information in “mathematical grinders”, as if to refine them in order to extract additional information.
In addition, our Forex University professional training offers extensive training in graphic analysis, which can be very interesting for traders wishing to start serious business in the best possible conditions.
Trading indicators and signals
Indicators include techniques for mathematical reprocessing of prices, most of the time with a curve that is placed under the graph of the currency’s prices and from which you can extract “signals” inviting you to buy or sell at a specific time.
Generally, when a beginner learns about technical analysis, he feels like he has found the Holy Grail: a set of techniques to apply to know what to do and when!
However, not everything is so simple because you have to know how to interpret the signals correctly, you have to know how to eliminate “false signals”, not to mention the fact that technical analysis isn’t an exact science and that the best analysis of the world will never be 100% right.
In our view, technical analysis is indeed more about “putting the odds on its side” by assessing which way the currency pair or other asset is most likely to move.
At this stage, it is essential to understand that trading involves risks and that nothing is ever 100% sure when it comes to technical analysis.
Why and how does technical analysis work?
Even if the technical analysis does not always work as well as we would like, it is clear that the results are often there… But why does it work?
So many traders place the same trades at the same time and thus move the market themselves (via the law of supply and demand) in the direction given by the signals.
If technical analysis works by self-realization, the tools used must be very widespread among traders. We will, therefore, carefully avoid the latest fashionable indicators, with calculations that are sometimes obscure if not completely eccentric.
The best jams are made in old pots, and this is also confirmed in technical analysis and trading.
It is, therefore, also useless to strive to find some signals that are not very visible, which will only be detected by a few traders (and these may not themselves follow them since they will know that few people will follow them).