How traders use analysis to forecast markets

Basic Principles

What is price movement analysis? It is a research approach that relies on historical data about prices and trading volumes to predict future market trends. Unlike studying a company's fundamental indicators, this analysis focuses exclusively on price behavior and chart patterns.

Traders use this method for:

• Definition of trend direction
• Searching for levels where the asset can change the direction of movement
• Generating signals for entering and exiting positions
• Assessment of the psychological state of market participants

The most commonly used approaches are simple support and resistance lines ( or combined indicators ) such as moving averages, RSI, MACD, Bollinger Bands (. However, it's important to remember: signals can produce false results, especially in short-term trades or in low liquidity markets.

History of Method Development

The first attempts to analyze markets appeared in the 17th century in Amsterdam and a century later in Japan. However, the modern approach is associated with the work of Charles Dow — a journalist and founder of The Wall Street Journal.

Dow noticed that prices do not move chaotically, but rather according to certain patterns that can be studied and systematized. His observations evolved into Dow's theory, which became the foundation for the further development of this field. Initially, the analysis was done manually — on paper with a pen. With the advancement of technology, the method became accessible to the masses and today is an integral part of investors' toolkit.

How it actually works

Basic premise: all known information is already embedded in the current price of the asset. Therefore, by studying chart patterns and volumes, one can predict where the price will move next.

Essentially, this is an analysis of the conflict between supply and demand. Price is the balance between the forces of buyers and sellers, reflecting the emotions of market participants: their fears and greed.

This approach is the most reliable in markets with large volumes and high liquidity. It is harder to manipulate prices in such markets, and signals are less distorted by anomalous influences.

Key Indicators Used by Traders

) Moving Averages ###MA(

The simple moving average )SMA( refers to the averaging of price over a certain period - it helps to smooth out short-term fluctuations.

Exponential moving average )EMA( gives more weight to recent prices, thus reacting faster to new data.

Both options help:

• See the trend direction
• Identify potential bounce points from support or resistance.
• Generate a simple trading signal: when the short MA crosses the long from bottom to top )golden cross( — buy, from top to bottom )death cross( — sell

) Relative Strength Index ###RSI(

RSI measures the speed of price changes on a scale from 0 to 100. It is an oscillator that shows the momentum of movement.

Traditional interpretation:

• Above 70 — overbought asset, possible downward reversal
• Below 30 — an asset that has been resold, a possible upward rebound

) Bollinger Bands ###BB(

This indicator consists of three lines: the central )moving average( and two side lines. They indicate market volatility and help to determine overbought or oversold conditions.

) MACD ### convergence/divergence of moving averages (

MACD is a trend-following indicator. It consists of:

• MACD Lines
• Signal Line
• Histograms

When the MACD crosses the signal line from bottom to top — a bullish signal, from top to bottom — a bearish signal.

Trading Signals and Their Reliability

Indicators generate signals that indicate potential entry and exit points:

Overbought/Oversold: RSI indicates when an asset is overbought ) time to sell ( or oversold ) time to buy (.

MA Crossovers: bullish and bearish signals based on the interaction of short and long moving averages.

MACD Signals: Crossings of the MACD line with the signal line indicate potential trend reversals.

Important to know: such signals are often false, especially on shorter time frames. There is a significant amount of “noise” — false signals generated by indicators.

To minimize losses, one should:

• Combine several indicators
• Apply risk management rules
• Check signals using other analysis methods

Criticism and Limitations of the Method

Many experts consider this analysis controversial. The main criticism is that it is a “self-fulfilling prophecy”: the method works because many traders use the same indicators, creating predictable outcomes.

Other restrictions:

Subjectivity: the interpretation of charts depends on the experience and opinion of the trader. Different people may draw different conclusions.

Market anomalies: during extreme volatility or unpredictable events, the method becomes less effective.

Not universal for everyone: however, proponents of analysis argue that each researcher develops their unique approach to using indicators. This means that it is practically impossible for a large number of traders to adhere to one exact strategy.

Despite the criticism, this analysis remains popular, especially when combined with other methods.

Technical Analysis vs Fundamental Analysis

Fundamental analysis assesses the true value of an asset through financial statements, economic indicators, and qualitative factors. Technical analysis focuses solely on prices and volumes.

• For short-term trades: technical analysis helps to find optimal entry and exit points.
• For long-term investments: fundamental analysis provides a better picture of the real value

Experienced market participants often use both approaches, gaining maximum information for decision-making.

Summary

Although what analysis is remains a controversial question, most traders prefer a combined approach. Fundamental analysis is better for long-term planning, but technical analysis provides valuable signals about short-term market conditions. For anyone trading, understanding both methods is the key to more informed decisions.