Technical analysis involves analyzing the past price movements of financial assets using a set of tools to predict future prices. The technical analysis process typically includes a combination of graphical analysis on price charts and technical indicators created through mathematical calculations.
Here are some tips that can simplify this process, which may seem complex to beginners:
1. Choosing the Time Frame:
The first step in technical analysis should be to correctly determine the time frame of the chart you will analyze. Charts can reflect movements over various time frames, from one minute to hourly, daily, or even monthly. Additionally, some platforms can display charts in time frames ranging from one second to one year.
Every trader can use different time frames according to their trading strategy. The important point here is the compatibility of the time frame of the price chart with the duration for which the position is planned to be held.
For example, traders who adopt a scalping trading strategy, which involves very short-term trades lasting only a few minutes, will find it more compatible to use one-minute, five-minute, or even shorter time frame price charts for technical analysis. Relatively longer-term charts such as one-hour or four-hour will not provide sufficient signals for this type of trading.
Conversely, it would be incompatible for a day trader who holds positions for several hours or a day to perform technical analysis on a one-minute price chart. In this type of trading, using technical tools with relatively longer-term price charts like 1 hour, 15, or 30 minutes can help achieve more compatible results.
2. Identifying the Trend
The second step for traders performing technical analysis will be trend analysis. Trend analysis involves analyzing both the current trend and trend reversals. Identifying the trend and predicting potential reversal levels is critical for traders who will both open positions in the direction of the trend and against it. Therefore, trend analysis holds an important place in every trader's trading strategy.
When identifying trends, traders likewise ensure that the time frame of the price charts is compatible with their trade durations. Additionally, traders can apply trend analysis on price charts of different time frames to compare them and evaluate market movements accordingly.
3. Identifying Support and Resistance
Support and resistance levels are the fundamental technical indicators, analyzed through price charts. Support represents price levels where the price slows down when decreasing, and resistance represents price levels where the increase is suppressed when prices are increasing.
Typically, as prices decrease and approach support levels, purchases rise and this leads to a rebound in price from these levels. As prices approach resistance levels, the expectation that the price can no longer increase raises sales, and the price begins to retract from these levels. Therefore, support and resistance levels serve as references for entry and exit levels to the positions.
4. Confirming the Signals of Indicators
In addition to analyses done on charts, there are many mathematical-based technical analysis tools available. These tools analyze asset prices from various aspects, including the direction of the trend, the momentum of price movements, volatility, and trading volume. However, making decisions based on just one indicator can be misleading. Using these tools together helps confirm the accuracy of signals.
For example, the momentum of price movements is as critical as the direction of the trend. A decrease in momentum during an upward trend could be a potential reversal signal. Therefore, after identifying the direction of the trend with trend indicators, traders can use momentum indicators to determine whether the movement is continuing strongly.
Similarly, volume indicators measure the trading volume behind price movements and help us confirm whether the trend is supported by volume. High trading volume is considered an indication of a strong trend, while a decrease in trading volume can potentially be interpreted as a sign of an impending trend reversal.
In conclusion, using different technical indicators together will not only be healthier than acting based on a single indicator but also provide information that cannot be obtained from graphical analyses alone.
At this point, it should be noted that using too many technical tools together can also lead to information overload. Ideally, traders should include only a few technical indicators in their strategy with which they feel comfortable.
5. Considering the Economic Calendar and News
The underlying factor of price movements is the expectations of market participants about future prices. These expectations are shaped through economic calendar data and news. Therefore, making decisions based solely on technical analysis tools may not ensure the desired outcomes.
The economic calendar allows traders to track upcoming economic events. These events include labor market reports, interest rate decisions, speeches by central bank officials, GDP, inflation, and production data, all of which have a direct impact on asset pricing. Usually, volatility increases before the announcement of significant data, which can create potential trading opportunities.
Additionally, the economic calendar provides market expectations for upcoming data releases. Assets begin to be priced according to market expectations even before the data is released. However, if the actual data differs significantly from expectations, sharp price movements can occur.
In such cases, the signals provided by technical analysis tools can become invalid. Therefore, it is critical for every trader to consider the economic calendar and important news flows that could affect the markets.
Conclusion
In conclusion, technical analysis, which might seem complex or challenging for beginners, can be simplified by paying attention to a few tips. Following these basic tips will simplify the technical analysis process and ultimately help traders better predict market movements and develop a healthier trading strategy.
For beginners looking to put these technical analysis tips into practice, Duhani Capital's Zero Spread Account offers an ideal starting point with its commission-free trading environment, allowing new traders to focus entirely on mastering technical analysis without worrying about trading costs.