CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

What Is Technical Analysis?

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Reading time: 2 minute(s)
There are three rules that form the foundations of technical analysis. Firstly, the market discounts everything. Secondly, prices move in trends. And lastly, history repeats itself. Learn more about technical analysis with this brief introduction.

In this lesson you can learn:

  • What stands behind the concept of technical analysis
  • How to analyse the market focusing mainly on the charts
  • Why history tends to repeat itself in financial markets

Broadly speaking, there are two approaches that traders use to access the market in order to determine whether a market will go up or down. These are known as fundamental analysis and technical analysis. The approach is similar to the one you take when you’re buying a car. You can analyse its price, or you can decide to take a look under the hood.

While fundamental analysis focuses on the economic information of a company, commodity or currency, technical analysis focuses on the chart to predict potential future price movements.

Technical analysis is one of the most popular methods used today by traders to help identify trading opportunities. There are three principles of technical analysis:

  1. The market discounts everything
  2. Prices move in trends
  3. History repeats itself

The Market Discounts Everything

Technical analysis only considers price movement, ignoring the fundamental factors, since all these factors affecting the market price are assumed to be contained within these movements. Therefore, all that needs to be examined is the price itself.

Of course an unexpected event - such as a natural disaster or geopolitical tensions - may affect a certain market, but a technical analyst is not interested in the reason. A technical analyst focuses on the chart itself and the shapes, patterns and formations occurring on the chart.

In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is considered more likely to be in the same direction as the trend than against it. Most technical trading strategies are based on this concept.

History Repeats Itself

The cornerstone of technical analysis is the belief that history tends to repeat itself. For example, if the EURUSD rose ahead of the FED’s meetings, a trader would buy the pair ahead of the next decision on interest rates in the United States.

As such, technical analysts utilise historic price data to help them forecast where prices are likely to head to next. This is where support and resistance levels come in.

Charts tend to form shapes that have occurred historically and the analysis of past patterns helps technical analysts to predict potential future market movements. This principle focuses on the technical analyst’s belief that trading is highly connected to probability.

The analysis of historical shapes gives the analyst advantage before opening a trade. These shapes are known as price patterns.

Forecasting the Future

Technical analysis is the practice of forecasting potential future price movements based on the examination of past price movements. Technical analysts believe that if the DAX was on the rise recently, it may gain further in the future because it is in an upward trend.

There are many different techniques for identifying trends, but much like weather forecasting, the results of technical analysis do not cover all possible eventualities. Instead, technical analysis can help investors anticipate what is likely to happen with prices over time.

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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