Published on: 2023-07-19
Updated on: 2024-07-04
technical analysis studies past price and transaction volume data to predict future price trends. This type of analysis focuses on the composition of charts and formulas to capture primary and secondary trends and identify buy/sell opportunities by estimating the length of market cycles. Based on the time span you choose, you can use daily (every 5 minutes, every 15 minutes, every hour) technical analysis as well as weekly or monthly technical analysis.
The basic theory of technical analysis:
(1) Dow Jones theory
The oldest theory in this technical analysis suggests that prices can comprehensively reflect all existing information, and the knowledge available to participants (traders, analysts, portfolio managers, market strategists, and investors) has been translated into pricing behavior. Currency fluctuations caused by unpredictable events, such as divine will, will be included in the overall trend. Technical analysis aims to study price behavior and draw conclusions about future trends.
The Dow Jones theory, which mainly revolves around the development of the stock market average, suggests that prices can be interpreted as waves that include three types of amplitude: dominant, auxiliary, and secondary. The relevant time period ranges from less than 3 weeks to more than 1 year. This theory can also explain the anti-gallop mode. Anti-roll mode is the normal stage experienced by a trend to slow down movement speed, with levels of 33%, 50%, and 66% for anti-roll mode.
(2) Fibonacci anti-galloping phenomenon
This is a widely used set of backtracking phenomena based on the numerical ratio generated by natural and human phenomena. This phenomenon is used to determine the magnitude of the rebound or backtracking between prices and their potential trends. The most important levels of anti-galloping are 38.2%, 50%, and 61.8%.
(3) Elliot's wave
Elliot scholars classify price trends using a fixed wave pattern. These patterns can represent future indicators and reversals. Waves that move in the same direction as the trend are called push waves, while waves that move in the opposite direction are called correction waves. The Elliot wave theory divides the driving wave and the correction wave into 5 and 3 main directions, respectively. These eight directions form a complete wave period. The time span can range from 15 minutes to decades.
The challenging part of Elliot's wave theory is that one wave period can be composed of eight subwave periods, which can be further divided into pushing and correcting waves. Therefore, the key to Elliot's waves is the ability to identify the environment in which specific waves are located. The Elliot faction also uses the Fibonacci anti-galloping phenomenon to predict the peaks and valleys of future wave periods.
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