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Technical analysis

Technical analysis (TA) is a market research using the chart of certain financial instrument. It takes into account the price and trading volume. Although the most important thing to analyze is price movement, still all assumptions that were made by price analysis must be confirmed in volume. For some financial instruments such as financial derivatives another parameter is included in analysis: open interest.

Technical analysis relies on three basic axioms:

(1) Everything is included in price

All external factors such as economic, political, psychological, are included in the price movements. It means that any price change is consequence of the change of an external factor. This approach is diametrically different from the fundamental analysis which studies external factors to determine future price movement.

Any price change is result of changes in supply and demand. If the demand is greater than supply, prices are rising and vice versa. Technical analysis does not analyze the economic factors leaded to changes in supply and demand, all what matters is that the price changed as consequence of change in supply and demand. Maybe the demand was increased for some reason (some news, political reasons, etc..), but it's not important from the perspective of technical analysis, important is only fact that the increased demand caused increase of the price. Therefore, it could be concluded that technical analysis indirectly takes into account the factors of fundamental analysis.

(2) Prices are moving in trends

Prices do not change chaotic, but follow the trend. It is assumed that the current trend will not change so soon, and if it changes, prices will follow the new trend. This concept is one of the most important elements of technical analysis. The whole idea of analysis is to identify the trend in its early stages and to trade in direction of the trend.

Price movements can be described with Newton's first law, which states that the object tends to retain the current state (move or don't move) as long as it does not affected with some external force. Similar goes for the trend: the trend will rather continue then to change, but when it changes it continues with the new course (trend).

(3) History repeats itself

Movement of prices in the past is reflection of various factors including the psychological. Thus, they show how buyers and sellers reacted to price changes in the past. Taking into account the fact that the psychological model of traders is unchanged, there is no reason not to believe that in future they will react in a similar way.

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