Technical Analysis as a tool for predicting price movements

Basic Principles

Technical analysis is an approach to studying markets that is based on the analysis of price history and trading volumes. Unlike fundamental analysis, which examines economic indicators and financial reports of companies, technical analysis focuses solely on price behavior and supply-demand.

Traders and investors use technical analysis to identify trends, determine key levels where an asset may find resistance or support, and to find optimal entry and exit points for positions.

The History of Technical Analysis

The first attempts to analyze price movements through graphical models appeared as early as the 17th century in Dutch trading centers. However, the foundation of the modern approach was laid by Charles Dow — the editor of The Wall Street Journal, who was one of the first to notice that markets move cyclically according to certain patterns that can be studied and predicted. His observations evolved into Dow's theory and became the foundation for the further development of this discipline.

In the early days, technical analysis relied on handwritten notes and manual calculations. With the development of computer technologies, it has gained widespread adoption and today is an integral part of the toolkit for modern traders.

Principles of Operation

The main hypothesis of technical analysis is that all publicly available information is already “encoded” in the current price of the asset. This means that by studying price patterns and trading volumes, one can predict the future direction of movement.

At a deeper level, technical analysis studies the game between supply and demand, which reflects the collective mood of the market. The price is the result of the confrontation between the forces of buyers and sellers, driven by human emotions: fear, greed, hope, and doubt.

The most reliable results of technical analysis are shown in markets with high trading volume and sufficient liquidity. In such markets, it is more difficult to manipulate prices, and there is a lower probability of unexpected spikes due to external influences.

Popular Technical Indicators

To analyze price movements and seek trading opportunities, traders use a variety of indicators:

Moving Averages (MA)

This tool helps smooth out short-term price fluctuations and identify the overall direction of the trend.

• Simple Moving Average (SMA) is calculated as the arithmetic mean of prices over the selected period.
• Exponential Moving Average (EMA) gives more weight to recent data, making the indicator more sensitive to current changes.

The classic strategy is based on observing the intersection of short-term and long-term moving averages, which often signals potential opportunities for making trades.

Relative Strength Index (RSI)

RSI is a momentum oscillator that ranges from 0 to 100 and measures the speed of price changes. Traditional interpretation: readings above 70 indicate that an asset is overbought, while readings below 30 indicate that it is oversold.

Bollinger Bands (BB)

This indicator consists of a central moving average and two side bands positioned at a certain distance from the center. They serve to assess market volatility and determine extreme price levels.

Convergence/Divergence of Moving Averages ( MACD )

MACD shows the interaction of two exponential moving averages and consists of the main line, the signal line, and the histogram. This tool helps to identify the moment of transition from one trend to another.

Limitations and Criticism of Technical Analysis

Despite its popularity, technical analysis has significant drawbacks. Many specialists refer to it as a “self-fulfilling prophecy”—a phenomenon where an event occurs simply because a large number of people anticipate its occurrence.

Main critical remarks:

• Subjectivity of interpretation — different traders may see different signals in the same chart
• False signals — they occur especially often during short-term trading or in low-liquidity markets.
• Inefficiency in extreme conditions — during sudden crises or unpredictable events, indicators often send incorrect signals.

However, proponents of technical analysis counter these arguments by pointing out that every experienced analyst develops their own unique approach to using indicators, making it impossible to mass replicate a single strategy.

Trading Signals and Their Reliability

Technical indicators allow generating signals for entering and exiting positions:

• RSI Signals — when the index moves outside the overbought/oversold zones, it may indicate a trend reversal.
• Golden Cross — when the short-term moving average crosses above the long-term moving average, a bullish signal is formed; the opposite crossing creates a bearish signal.
• MACD Signals — the crossing of the main line through the signal line also indicates a possible change in direction.

However, it is important to understand that no indicator guarantees accuracy. Noise and false signals are an inherent part of the market, especially on short timeframes. That is why experienced traders always combine technical analysis with risk management methods and additional analysis tools.

Technical Analysis and Fundamental Analysis: Synergy of Approaches

While technical analysis focuses on price patterns, fundamental analysis examines the intrinsic value of an asset through financial indicators and economic data.

Areas of Application:

• Tech analysis — ideally suited for short-term trading operations, where it's important to determine the optimal moment.
• Fundamental analysis is more relevant for long-term investments when it is necessary to assess the real value of an asset.

Modern investment practices show that combining both methods provides the most objective assessment of the market situation.

Conclusions

Technical analysis remains a powerful tool in the arsenal of traders, despite ongoing debates about its actual effectiveness. Combining technical analysis with a fundamental approach allows investors to gain a comprehensive understanding of the market — both short-term price fluctuations and long-term asset development trends.

Key takeaway: to minimize risks, one should always cross-check technical analysis signals with other methods and apply a disciplined approach to capital management.