Important Laws of Technical Analysis | Value Network

Important Laws of Technical Analysis


Technical analysis is a process used to examine and predict the future prices of cryptocurrencies, commodities, and securities by looking at things like price movement, charts, trends, trading volume, and other factors. Unlike fundamental analysis, technical analysis focuses on trading signals to delineate good investments and trading opportunities by examining an investment’s trends through its trading data and other statistical elements.
As a general rule, technical analysis prizes the current or last price of a security as the best indicator of the future price of that security. Technical analysis relies heavily on financial charts, data, and statistics to uncover an investment’s strengths or possible weaknesses and forecast trends in order to help analysts and investors decide if security is viable or not, and for what action.

1. Identify the market trend

The trend is not always easy to identify for novice or newbie traders. Occasionally it is necessary to use various technical analysis tools to find it. What apparently might seem a flat movement in the short term could prove to be a long-term trend. Even if you dedicate yourself to trading at reduced time intervals it might be helpful to understand the big picture and act accordingly. This method will also help you get rid of the “noise” of the price, and adding too many unnecessary indicators that can be detrimental to your trading success in the long term.
What apparently might seem a flat movement in the short term could prove to be a long-term trend

2. Draw the trend line

As soon as you have determined the trend direction, tap it with a line or two. The line must connect the points on the price chart. The downward trend consists of a series of minimum levels that tend towards the bottom. The uptrend, on the contrary, is a collection of maximum levels that rise over time.

3. Using Moving Averages – Simple and Exponential Moving Averages

A moving average is a simple technical analysis tool, which can however provide very valuable information to an experienced trader. It is able to determine the direction of the trend (in case it is not clear from the graph). A moving average can also allow you to determine the optimal entry and exit points.

4. Follow the trend

According to Murphy, the trend is your best friend. Do not go against it, but follow it. However, you must decide the time frame to trade on before starting any operation. Make sure you do not open a position in the short term based on the long-term trend. Use a moving average to determine and follow the trend

5. Support and resistance

Support and resistance levels are key concepts of technical analysis. For some time, support represents the lower boundary of price action. Resistance, in turn, is the upper threshold, which the price should not exceed. When the price of the asset exceeds the resistance, the area should represent a new level of support.

These suggestions should not be followed as unbreakable laws. But rather should be taken as a collection of useful tips that will allow you to better understand the markets and that, if applied correctly, will improve your trading skills.

This article does not represent investment advice. Any reference to past movements or price levels is informative and based on external analyzes, we do not provide any guarantee that such movements or levels may reoccur in the future.

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