There is no such thing as zero risk trading. From properties to cryptocurrencies, all investments come with varying degree of risks. As such, any investors worth their salt take calculated risks in order to keep their losses to a minimum and gain optimal returns.
One of the well-known strategies that investors employ is to “buy low, sell high”.
For example, by selling the asset that you have bought for a hundred dollars at a current price of two hundred dollars, you will gain one hundred dollars in profit. It’s not rocket science.
However, that’s easier said than done. How do you predict the trajectory of the asset’s price? How do you know when you should buy or sell off some of your Bitcoin? How do traders and analysts look at a trading chart and go “hmm, it may be time to sell soon”?
In the late 19th century, a journalist closely analysed the American stock market data that he has compiled, believing that there are patterns and business cycles in this data waiting to be discovered. That journalist was Charles Dow, and this form of technical analysis is named the Dow Theory.
In finance terms, technical analysis is a methodology used to forecast the price action by studying past market data mainly price and volume and it’s one of the most popular of its kind. Bear in mind that the Dow Theory is only one of the many types of technical analysis out there and it’s certainly not the first either. Amsterdam-based merchant Joseph de la Vega’s accounts of the Dutch financial markets in the 17th century was one of the earliest examples that predate the Dow theory.
In this article, we will be focusing on technical indicators which are pattern-based signals based on historic price, volume, and/or open interest used by traders that employ technical analysis.
There are hundreds of technical indicators that have become subjects of intense discussions and scrutiny. Common ones like MACD and RSI have found their ways into the repertoire of indicators used by traders.
As thousands of traders converge on the signals exhibited by the technical indicators, it invariable become a herd effect which becomes a self-fulfilling prophecy. This means if an indicator shows a Buy level, thousands of traders will act on it and thus, reinforcing the indicator’s signal.
We can safely arrive at a conclusion that technical analysis is helpful in providing some pointers that enable you to act according to price action and determine the optimal time to buy or sell.
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