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Technical analysis is a theory which has many aspects and approaches yet all of them agree on this simple fact: All economic factors, macro and micro, Geo political and other factors which affect the stock/index price are embodied in the price chart.
The Technical analysis theory provides tools the investor. Through the use of different models the investor analyzes the price chart for a given asset, these models provide the investor win an additional tool for his investment decision making.
The Technical analysis Theory has many approaches; in this article we will approach the three most important ones.
Japanese Candlestick Theory
This theory was invented by Japanese rice traders, it transform the price movement chart so it consists of candles each candle according to its sampling time (intervals) includes information about the opening price, a high price a low price and a closing price for that specific candle.
As mentioned a candle can be sampled at different time intervals, by a second, Win, 15 Wins, hour, day, week, month and so on.
Japanese rice traders claimed that by viewing a candlestick price chart, it is easier to locate price movements and patterns which repeat themselves, these patterns could be used to predict the behavior of future asset prices.
The Fibonacci numbers/sequence
The Fibonacci numbers are a mathematical series where each subsequent number is the sum of the previous two. (The first two Fibonacci numbers are 0 and 1) The original use for these numbers was made by a mathematician named Leonardo Fibonacci which used it to describe population growth in rabbits.
While going up through a series of Fibonacci numbers, the calculated rate between any two consecutive numbers will strives to a value of 1.6180000
In the Context of technical analysis, Fibonacci sequence is used to describe a series of technical corrections to a bearish or bullish price trend. This technical corrections rate move between levels of 61.8%, 50%, 38.2% and 14.5% correction from the previous trend
These correction levels are technical corrections based on a Fibonacci bar and they are supposed to predict the end of the correction and the Continue of the previous trend.
According to this technical correction scale we can predict the continuance of a trend, or a trend reversal the short or the long term.
Bollinger BandsThe Bollinger Bands were invented by J. Bollinger and are a color band (usually 3) which defines the expected price levels. The middle band is actually a simple moving average for the price, the top band is a simple moving average for the price plus a certain number of deviation units and the lower band is a simple moving average for the price minus a certain number of deviation units.
Bollinger has concluded from his studies that the best use of these Bands is achieved by choosing a simple moving average for 20 days and 2 units of deviation from it, since statistical studies have shown that stock prices will keep the two units of deviation from its moving average in 95% of the cases. This approach basically claims that stock prices always move between an upper and a lower band depending on the period we use calculating the average.