Technical analysis is the analysis of price. In detail, it is the study of earlier market movements to attempt to assess how the market might work and what the market might perform in the future.
The fundamental analysis comprise of analyzing the forex and business characteristics for its value estimation based on the revenue, industry trends, etc. Whereas the technical analysis does not involve considering the business value, and it takes the process of analyzing the price movements in the market mainly by reviewing historical data.
Both fundamental and technical analysis is useful for the traders to make their trade successful. In fact, most of the traders and investors use both fundamental and technical analysis while making any trade decision.
The different Technical Analysis Approaches
The technical analysis helps the traders and investors to steer the gap between the fundamental value and market value by leveraging methods such as statistical analysis and behavioral economics. Technical analysis aids to guide the traders to understand the past happenings in the market.
There are two approaches in the technical analysis: the top-down approach and the bottom-up approach. Most often, short-term traders prefer choosing the top-down approach, whereas long-term traders prefer a bottom-up approach. Below are the details.
Bottom-Up Approach: The analysis that involves the study of individual forex instrument or commodities. That is, the investor can analyze the fundamentals of the trading instrument. Traders use this approach for their long-term profit plans.
Top-Down Approach: The analysis that studies at the entire economy before concentrating on the individual securities. That is, the investor can analyze the economic factors to find how it affect the overall market. Traders who use this approach mainly focus on short-term profits than long-term profits.
Getting Started with the Technical Analysis Strategies
Apart from these approaches, there might be various types of traders who use different methods of technical analysis. The position traders may prefer using chart patterns and technical indicators, while day traders prefer simple trend lines and volume indicators for their trading decisions. Let us now see how to get started with the technical analysis.
Step 1: Identifying a technical analysis strategy
The first and foremost step that has to be taken in to identify or develop a technical analysis strategy. Each strategy will have different purposes. For example, the technical analysis indicators moving averages and bollinger bands helps the traders to examine the past and forecast the future trends and patterns. However, always remember that the strategy or plan that you choose is fit for your trading process and helps you to achieve success in trading.
Step 2: Identifying the securities to trade that fit for the technical analysis strategy
The forex instrument and security will not fit the identified or predefined strategy. Various currency pairs or commodities may also require diverse parameter choices. So the importance of identifying the securities to trade that suits the defined technical analysis strategy is higher.
Step 3: Choosing the right and reputable brokerage for trade execution
Choose the right trading brokerage and trading account that supports the type of security that you have chosen to trade. The trading account should allow all the features and functions of the technical indicators that help the traders to indicate the right direction towards profits.
Step 4: Choosing an interface for trade tracking and monitoring
The functions and the features that a trader require in making their trade successful varies based on the strategy, the goal that has been set, etc. So, it would be better if you choose the right interface or platform that supports tracking and monitoring the trades.
Step 5: Identifying the other features that may be required for the implementation of the strategy
There may include some features or functions that are required to maximize trade performance. For example, some traders may need instant mobile alerts or access to fast trading on the go, while some other traders leverage automated trading systems to perform trade execution on their side. Make an analysis on whether there are any other indicators or tools that are required for the trade.
Many huge investors and hedge fund managers believe that technical analysis has an immense role and a position in every investor's toolkit. Also, many investors use both the fundamental and technical analysis for their trading decisions. Since technical analysis aids the traders to gain the gaps of knowledge, the traders and investors can enhance their long-term returns with less complexity. But it is more important and advisable that every trader practice these strategies before investing real money to avoid high losses.