In this note I am going to tell you everything about him. technical analysisa crucial tool in decision making investment. However, its effectiveness largely depends on how it is used.
Technical analysis focuses on examining changes in the price and volume of a specific asset. In essence, it seeks to predict how prices will move in the future to increase the chances of success when investing, taking into account that investing is a probabilistic activity.
What does it mean that investing is a probabilistic activity? Basically, there is no absolute certainty about the result of an investment. In other words, there is always a degree of uncertainty associated with any investment we make.
What is technical analysis?
Technical analysis is a methodology used by investors to evaluate and predict future price movements of financial assets, such as stocks, bonds, currencies and commodities. Unlike fundamental analysis, which is based on economic and financial data of a company, technical analysis focuses mainly on the study of price charts and trading volume.
Basic principles
With these contributions, the foundations of the technical analysis were laid. And some fundamental principles were derived:
- The price discounts everything: is the cornerstone of technical analysis. It assumes that all the variables that affect the market (political, economic, social factors, among others) are already reflected in the price of that asset.
- The price moves in trends: The trend is fundamental for technical analysis. The goal is to identify trends so you can invest in the right direction.
- History repeats itself: It means that historical charts and patterns tend to repeat themselves, so they can be used to predict future movements.
Main tools
- Price charts: Price charts show the historical price evolution of a financial asset over a given period. The most common chart types are line charts, bar charts, and candlestick charts.
- Technical indicators: Technical indicators are mathematical formulas applied to prices and/or trading volume to identify trends, overbought or oversold levels, and possible market entry or exit points. Some of the most used technical indicators are the RSI (Relative Strength Index), MACD (Moving Average Convergence/Divergence) and moving averages.
- Price patterns: Price patterns are repetitive formations on price charts that can indicate a change in trend or a continuation of a trend. Some examples of price patterns are the double top, double bottom, and head and shoulders.
The importance of following trends
One of the main advantages of technical analysis is its ability to identify trends in the prices of financial assets. I want to emphasize the importance of this, since it is what prices really do.
The explanations for the reasons why a certain asset rises or falls usually come after the price movement. Therefore, the important thing is to follow prices, beyond the noise of the news. The goal is to go with the pack and ride the wave. The motto of this operation is “buy what goes up and sell what goes down.”
Are there people who operate according to other patterns, even though the asset does not stop falling? Yes, but it is not recommended. One of the basic rules in investing is “don’t try to catch falling knives.” It means that you don’t have to buy what happens. Simply because we do not know how long it can fall, and we run the risk of losing all the capital.
Identifying a trend is not a simple task. Different tools can be used for this, but the simplest and most effective is the use of moving averages.
Example: daily chart of Banco Galicia, with moving averages of 50 and 100 periods.
Tips to improve your decisions
- Combine technical analysis with fundamental analysis: While technical analysis can be a powerful tool for making investment decisions, it is important to combine it with fundamental analysis to get a more complete view of the market situation and the companies in which you are investing.
- Maintain discipline and emotional control: Technical analysis can help you make objective decisions based on data and evidence, but it is important to maintain discipline and emotional control to avoid making impulsive or irrational decisions. The most important thing is to respect the plan.
In short, technical analysis is a valuable tool that can help you make better investment decisions in the financial market.
Of course, there is no infallible formula for investing in the stock market. When used correctly, technical analysis simply adds a valuable tool that can increase our chances of success.
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Note: The material contained in this note should NOT be interpreted under any circumstances as investment advice or a recommendation to buy or sell a particular asset. This content is for educational purposes only and represents the opinion of the author only. In all cases it is advisable to seek advice from a professional before investing.
Source: Ambito
I am a 24-year-old writer and journalist who has been working in the news industry for the past two years. I write primarily about market news, so if you’re looking for insights into what’s going on in the stock market or economic indicators, you’ve come to the right place. I also dabble in writing articles on lifestyle trends and pop culture news.
