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How does technical analysis work?

Technical analysis is used by investors to understand the market trend. It is an important tool to use alongside fundamental and sentimental analyses. Though some traders completely depend on fundamental analysis, technical analysis is essential for estimating price trends in order to make short-term gains.

What is technical analysis?

Technical analysis is a method to predict future price movements by considering previous trends. Technical analysts review charts, analyze the past price action, and estimate upcoming price movements. Many traders rely on chart patterns and use different types of technical indicators to identify when to buy or sell a particular asset. By knowing when to enter and exit a trade, investors can increase the chances of making profits.

How does it work?

Chart patterns in technical analysis are a visual representation of market psychology. It works based on three basic principles:

  • The market prices reflect all information about an asset such as micro and macroeconomic situation, industry, regional, and political conditions.

  • The price of a certain trend will remain in that trend unless there is a clear indicator of its reversal.

  • The collective behavior of investors towards an asset repeats and follows a specific pattern. Hence, you can forecast prices based on past market trends.

Technical analysis involves several tools like different types of chart patterns, market indicators, and moving averages. It allows you to instantly find out whether supply or demand is in control of the price. You can make trading decisions quickly, which makes technical analysis favorable for day trading. Users can apply technical analysis to a wide range of trading instruments such as cryptocurrencies, commodities, stocks, and futures.

However, no method can supply 100% correct estimations. If that were the case, then a lot of us would be billionaires by now.

Technical analysis helps traders find out when to buy and sell assets so as to increase their profits. But, successful trading always considers several fundamental and technical factors in tandem with logical risk management strategies.

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