Technical Indicators: The Mathematical Part of the Chart

Are you starting to trade? Not sure how technical analysis works? Know everything about it, its subdivisions, and understand why it is essential to know the pros and cons of this type of analysis.

Chart analysis is the branch of technical analysis that studies the patterns that are formed in stock prices. The chart analysis was born around the year 1930 from the hand of Dow Jones. The first chartist theory that existed and is, in fact, studied is the Dow theory. Since it was born, research in this field has proliferated. Later, thanks to technology, technical indicators would appear on the scene. The chart figures, together with the stock market indicators, form the technical analysis.

Main chartist figures

Chartist figures can be classified based on two criteria – according to their implications and according to their complexity. Its implication depends on whether the pattern indicates the end of the trend, a continuation of it or not necessarily any of the above. Whether the pattern forms in a few periods or many periods dictate its complexity. 

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Chart analysis vs technical indicators

Chart analysis and technical indicators form into technical analysis. We can’t say that one type of analysis is better than another. Both types of analysis are valid. Depending on the characteristics of each trader, one or the other will be more recommended.

In any case, it is easier to check whether a trading system works, where technical indicators undergo utilization. This is so because technical indicators constitute the quantitative part of technical analysis. 

Chart analysis is more subjective and technical indicators more objective. It does not mean those technical indicators also present problems of subjectivity when interpreting them. Some technical indicators contradict each other at certain times.

However, they are not incompatible. Some analysts use technical indicators to confirm chart patterns. And vice versa, others use chart figures to confirm the patterns drawn by technical indicators.

Quantitative analysis

Quantitative analysis is the branch of technical analysis. It refers to the use of mathematical and statistical methods to evaluate the possible future movement of an asset. The well-known technical indicators generally represent these mathematical processes.

Here programmed algorithms come into play to mark market entries and exits. Therefore, the advantage over classic trading is that the individual’s subjectivity becomes devoid. There are no emotions; one does not operate more out of enthusiasm and less out of fear. Psychology and emotionality go out the window. Thus, you end up with only working with numbers and percentages. This new concept is extraordinarily revolutionizing trading and will take it to a new dimension. However, it will probably make it much more restrictive. The advantages of quantitative analysis are fully demonstrated compared to traditional analysis.

Envelopes – Trend indicators

The Envelopes indicator is a perfect trend indicator, especially for those who are beginning in the world of trading. It aims to identify the upper and lower limits of a trading range. 

The indicator consists of 2 Moving Averages. One shifts upwards and the other – down. Envelopes can be used as bands around price action signifying overbought and oversold levels and can also be used as price targets.

For many traders, envelopes are considered to be a variation of Bollinger Bands. The basic principle of both tools is the same: after any fluctuation, the price will always return to the main trend.

The default MetaTrader set includes the envelopes indicator. 

Due to its easy use, and its adaptability to different types of trading for more aggressive traders, it is usually used with lower parameters and for medium/long-term traders, with higher parameters.

• Related: Why Does Quantitative Trading Improve Technical Analysis?