Technical Analysis: Application on various assets

Technical analysis can be applied to any asset class as long as the asset type has historical time series data. In the context of technical analysis, time series data pertains to the price variables - open high, low, close, volume etc. The following analogy may prove useful.

Consider learning how to drive a vehicle. After learning how to drive, you can theoretically operate any vehicle. Likewise, technical analysis is only required to be learned once. You can then apply the notion of technical analysis to any asset class, including stocks, commodities, foreign currency, fixed income, etc. This is also likely one of the greatest advantages of TA compared to other academic disciplines. For instance, when conducting a fundamental analysis of stock, one must examine the income statement, balance sheet, and cash flow statement. Nonetheless, basic analysis for commodities is very distinct. If you are working with agricultural commodities such as coffee or pepper, the basic analysis will include a review of rainfall, harvest, demand, supply, among other factors. However, the fundamentals of metal commodities and energy commodities are different.

Therefore, each time you select a commodity, the fundamentals will change. However, the concept of technical analysis will remain the same irrespective of the asset you are studying. For example, an indicator like ‘Relative strength index’ (RSI) is used exactly the same way on equity, commodity or currency. Assumption in Technical Analysis Technical analysts are not concerned with a stock's valuation, in contrast to fundamental analysts. The only thing that matters is the past trading information for the stock (price and volume) and the insights it can offer into the direction the security will take going forward. To get the optimum result from Technical Analysis, one needs to be conscious of these presumptions.

1)Markets discount everything – This assumption informs us that the most recent stock price reflects all facts in the public domain. For instance, a company insider may purchase a significant amount of the company's stock expecting a positive announcement of earnings. Although he does this secretly, the price responds to his activities, showing the technical analyst that this would be a good buy.

2)The ‘how’ is more important than ‘why’ – Going with the same example as discussed above – the technical analyst would not be interested in questioning why the insider bought the stock as long he knows how the price reacted to the insider’s action.

3)Price moves in trend –The concept of trend is the foundation of technical analysis. Any upward or downward in any index doesn’t usually happen overnight. But, once the trend is established, the price moves in the direction of the trend.

4)History tends to repeat itself – The price trend frequently repeats itself in case of technical analysis. This occurs because every time the price moves in a particular direction, market players continuously respond to price movements in a strikingly similar manner. For example, a declining trend causes market players to want to sell despite low and unattractive pricing. The pricing history will continue to repeat itself because of this human response.