Technical analysis is a study of the dynamics of market data to predict future price behavior.
The primary source data for the technical analysis of exchange-traded financial markets is the price, volume, and open interest. Something that day traders should know about.
Charles Dow (1851-1902), the first editor of the Wall Street Journal, co-author of the Dow Jones index, is considered the founder of modern technical analysis.
Here are some of the ways you can use technical analysis.
1. Technical analysis using charting patterns
Using this method, technical analysis specialists focus on images: support and resistance levels, trend lines, and Fibonacci levels to identify well-known classic graphical models, such as symmetrical triangular vertices and consolidation patterns. These models give a clear idea of the strengths and weaknesses of buyers and sellers in the market.
2. Technical analysis using candlestick patterns
Many traders use technical analysis of candles or candlestick charts that display the levels of open, close, high, and low for a certain period to determine patterns in behavior of buyers and sellers.
3. Technical analysis using indicators
In a technical analysis, indicators are used to determine market conditions. For example, many technical indicators give signals about when the market is overbought or oversold. Other indicators provide clues about the rise and fall of the impulse.
Why is technical analysis important for a day trader?
As a day trader, you have to make crucial trading decisions in a limited time. You have to make profits from small movements of currency pairs.
Here’s how technical analysis can help day traders:
- Technical analysts believe that all factors which affect the price are already taken into account in supply and demand. Therefore, it doesn’t matter for what reason the price has risen or fallen; only the price change itself is essential. Because day traders don’t have much time at their disposal, knowing only about the price change can help them make quick judgments.
- Prices do not move randomly but obey specific laws. The day trader needs to recognize the trend in time and join it. By using technical analysis, day traders can predict that the current trend is likely to continue to develop and not unfold in the opposite direction. And the trend will develop until there are signs of a reversal.
- Technical analysts determine the direction of the current trend by changing the highs and lows of the price. Consistently rising highs and lows show the bull market when currency pairs or the entire market has been growing for a long time. Steadily lowering lows and highs show the bear market, when currency pairs or the whole market goes down for a long time. Lows or highs that are approximately at the same level indicate a horizontal trend. Day traders can only get this information from technical analysis.
- Day traders tend to behave similarly in certain situations. By using technical analysis, he/she can find out the historical data of a currency pair and apply familiar strategy.
As you can see, the importance of technical analysis is obvious for day traders.