Technical Analysis

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17 Jan 2024

What is Technical Analysis?

Technical analysis ; It can be defined as the methods used to produce accurate predictions for price movements that have not yet occurred by examining past price movements with the help of various tools and indicators .
The foundation of technical analysis is built on the assumption that market prices reflect all information. According to this proposition, the market has priced everything and therefore past price movements are the most important criterion used in predicting future prices.
Although technical analysis methods are more efficient in some markets and less effective in others; It can be applied to almost every asset class, especially stocks, foreign exchange, commodities and cryptocurrencies.
Technical analysts; They identify patterns and trends in price movements using tools such as charts and technical indicators. These patterns and trends are expected to serve as a reference for investors when making trading decisions.

The Emergence of Technical Analysis

The origins of technical analysis are thought to date back to 17th century Japan. At that time, Japanese rice traders were trying to predict future price movements by observing seasonal movements and patterns on rice prices.
Over time, these observations and analyzes began to be expressed in visual representations known as candlestick charts. Traders noticed that price movements repeated forming certain patterns and believed that these patterns were helpful in predicting future price movements. It is thought that the term Japanese Candlestick , which is the original name of the candle chart term in technical analysis , was derived from here.
The basis of modern technical analysis is based on the Dow Theory. This theory was developed by Charles H. Dow and aims to predict the direction of the market with the guidance of indices such as Dow Jones Industrial Average and Dow Jones Transportation Average.
If the indices in question are rising, stocks must follow and gain value at some point. On the other hand, if the indices are falling, the stocks will soon lose value. This approach, which remains extremely simple considering the current state of technical analysis, was a revolution for the period in which it emerged.

Basic Concepts of Technical Analysis

In order to make correct inferences with technical analysis, charts must be read and interpreted correctly. For this reason, it is extremely important to master some concepts that form the essence of technical analysis. These concepts; They can be listed as rising channel, falling channel, support and resistance levels.

Support Level: These are the points on the price chart of a financial instrument where the asset price has previously stopped or slowed its decline. These levels are considered areas where investors may tend to buy. On the other hand, for example, a stock may not have a single support level. In other words, if it breaks the first support level, the second and third support levels should also be determined. For this reason, buying an asset directly at the support level without considering fundamental analysis and general market conditions may not yield correct results.
Resistance Level: In financial markets, "resistance level" refers to a level at which an expected price increase may stop or slow down in cases where the price of an asset has an upward trend. Resistance levels can also be considered as points on the price chart where the asset price previously stopped or slowed down its rise. These levels , are considered as regions where investors may tend to sell. Just like the support level, the resistance level does not have a single line. In this context, it would be a rational strategy to consider market conditions and fundamental analysis as a whole.
Rising Channel: It indicates that a financial instrument is generally rising in a trend. This technique analyzes a pattern in which prices rise regularly within a certain range and this rise occurs between two parallel lines. It helps investors see the points where the trend may continue or exit the channel.
Descending Channel: It is a pattern in which prices regularly fall within a certain range and this decline occurs between two parallel lines. In this analysis method, the upper resistance line and the lower support line are important. In a descending channel formation, the upper resistance line connects the peaks where the price fell. It represents the level at which the price of the asset usually falls but has previously stopped at a certain point and turned up. In the descending channel technique, the lower support line connects the bottom points where the price fell. This line describes a level that provides support in case the price of the asset rises.

Technical Analysis Indicators

In technical analysis, there are many indicators used to evaluate the data obtained from price charts and determine trends. Here are the technical analysis indicators most used in the stock market by investors and analysts:
RSI (Relative Strength Index): Gives signals about price momentum in technical analysis. It helps measure price changes and analyze trend reversals and momentum strength, while showing overbought and oversold areas.
MA (Moving Averages) - Moving Averages: Thanks to the moving average, investors extract the average value from past price data and have an idea about the course of the market. As a result, risks arising from short-term price fluctuations are greatly reduced.
The moving average is described as “moving” because it moves with updated prices as new data arrives, that is, it is not a fixed indicator. There are types such as Simple Moving Average (SMA) and Exponential Moving Average (EMA). Moving averages can help identify trends and pinpoint entry/exit points.
MACD (Moving Average Convergence Divergence): It is an oscillator that calculates the difference of two different moving averages and draws the curve of this difference. It is used to monitor trend changes and momentum.
Bollinger Bands: It is an indicator that adds upper and lower bands around moving averages. By measuring volatility, it shows overbought or oversold areas of the price and potential trend reversals.
Stochastic: The stochastic indicator is an indicator that measures closing prices against daily highs and lows for a selected period and analyzes turning points of prices. In other words, it is an oscillator used to identify overbought and oversold areas.
The Stochastic indicator is more sensitive to price changes and has a larger variation range. Unlike the RSI indicator, this indicator contains more detailed information about the current market situation.
Parabolic SAR: It is an indicator that helps us calculate where the trend will start and where it will end. Parabolic SAR shows potential reversals in price movement and appears as dots on the chart. Basically when the dots are below the candles it is a BUY signal. When the dots are above the candles, it indicates a 'SELL' signal.
Fibonacci Retracements: A tool used to identify possible support and resistance levels of retracements of a particular move (usually an up or down trend). Levels are calculated based on Fibonacci numbers.

Advantages of Technical Analysis

Conducting technical analysis in a systematic and disciplined manner can significantly increase your profitability in the markets.
Graphical Representation: Provides the opportunity to visually analyze price movements through graphs. In this way, price trends, patterns and formations can be seen more easily.
Quick Forecasts: Useful for predicting short-term price movements. It can be an effective tool for short-term investors to make split-second decisions and trades.
Learning with History: It tries to predict possible future movements by examining past price movements. It is based on the idea that past trends and patterns may repeat in the future.
Useful Indicators: The indicators used help evaluate market trend and momentum beyond price movements. Thanks to these indicators, you can better understand different market conditions