Have you ever wondered how professional traders can sometimes predict price behavior so accurately? How do they know when to buy or sell an asset?
The recipe is to use historical price data to identify patterns and trends that can help us predict the future in many, many scenarios. And that five-star Michelin recipe results in a top-notch dish: technical analysis.
Buckle up trader, because we are going to break down technical analysis and how we can use it to improve your results.
What is technical analysis in trading?
Technical analysis is a methodology for analyzing financial markets based on the study of historical price behavior.
Its objective is to keep us informed of the past and present of prices, in order to make projections of the future with more probabilities of success, by identifying patterns that allow us to anticipate market movements.
How does technical analysis work?
Through the study of price charts, technical indicators (especially those powered by AI) and price action.
The study of price charts: A visual representation of the evolution of prices over time. It allows us to identify trends, patterns and other behaviors of interest.
The use of technical indicators: Technical indicators are tools that help us
identify patterns and trends in data. There are hundreds of different technical indicators, each with its own characteristics and properties. Today the power of AI allows us to take them to the next level.
Price action: The here and now of prices, right now. The study of price action allows us to identify trading opportunities in real time.
Recognized figures in technical analysis
We are talking about a discipline with a long history, and there are many recognized figures who have contributed to its development. Let's mention some of them:
Charles Dow: Dow is considered the father of technical analysis. In 1896, he founded the Dow Jones Industrial Average, the most important stock market index in the world. Dow developed the Dow Theory, which has rules that we still follow today.
Ralph Nelson Elliott: To him we owe the Elliott Wave Theory, a theory that describes the behavior of prices in cycles of 8 waves. He changed the course of the investment world in 1934.
William Gann: He developed a series of technical analysis techniques based on geometry and mathematics. Gann's techniques are very popular among high-frequency traders. His fame at the beginning of the 20th century was notorious to the point that he is said to have predicted the great crisis of 1929 a year in advance and achieved returns in excess of 1000% per month.
Recommendations for making the most of technical analysis
Learn the basics of technical analysis: There are many resources available, some free, to learn about technical analysis including books, our online course and webinars.
Use the right tools: Don't limit yourself to using just one technical analysis tool. Getting a complete view of the market is not complicated only if you are in the right place:
As a broker we recommend TradingView, which offers an intuitive interface and a large number of technical indicators especially those we have developed with AI. But there are also MetaTrader4 and Esignal.
Yes, we always say it but we repeat it: Patience and a hawk eye at all times. Technical analysis is not an exact science. Don't expect perfect results right away.
Stay connected with your community: The market moves every day and we always keep in touch about all the trends. Don't get left behind!
Technical analysis is not a magic wand that will make you money effortlessly. We are engaged in a risky business, and there is always the possibility of losing money.
It is important to manage our risk properly and not invest more money than we can afford to lose.
Ready to take your trading to the next level this week? Let's go for those results!
For this article, prompts have been used to request information
interpreted and provided by AI (Google Bard). Written and edited
by Kevin David Terán and verified by Pedro Arizaleta and Erwin Sánchez