CO06 - What is Technical Analysis?

"Technical analysis is one of the most commonly used methods to understand what price of a security is doing. Using technical analysis, traders try to figure out when to buy or sell the security or the forex currency pair. Technical analysis is an umbrella term. There are many different ways of using technical analysis, which will be explore in this article. This type of study of the markets is used to understand what price will do. It is mostly used by day traders; traders who buy and sell within the course of the regular trading day. Technical analysis, depending on the type of analysis you are using can be easy or difficult. Still, many find technical analysis to be an easy way to trade the markets. You can quickly learn the various trading strategies by just studying a few technical indicators. Learn more about what is technical analysis and how you can use it in your trading with this article."

Technical analysis is a field of study of market analysis which relies upon the study of the market action. Using technical analysis, investors and speculators try to gauge what price will do in the future over the short term.

Technical analysis can therefore be summed up as a study of price of the security that is being analyzed. Technical analysis takes a completely different approach to fundamental analysis. Price of the security is the only thing that matters. Technical analysis deals with the price movement of the markets.

In some cases, depending on the markets in question, you can also apply volume. Volume is nothing but an indicator that is displayed on the price chart. The volume merely tracks the amount of transactions that take place in the market for the security in question. In the forex markets, volume is not an accurate indicator.

This is because forex or currency pairs are traded over the counter. Therefore, there is no accurate representation. In comparison, volume is a more reliable indicator when it comes stocks or exchange traded derivatives such as futures.

Traders make use of technical indicators which are basically mathematical formulae derived from price itself. Depending on how these indicators behave, traders can buy or sell the security, or in our case, the currency pair.

Technical analysis basically focuses on aspects such as price, volume, open interest and so on. These are essential in determining the price of a security through technical analysis. By analyzing the past price, technical analysts are able to predict the future movement in the price of a stock or a security.

In the forex markets, traders generally apply technical analysis as their basis for trading. When their technical indicators tells them when to buy or sell, trades are made accordingly.

One important distinction to make is that technical analysis does not focus on intrinsic value of the security. On the contrary, it merely tries to apply the past price behavior and predicts how price could behave in the future.

There are three main tenets of technical analysis, which are summarized as below:

Price discounts everything: This means that the price of the security or the currency pair has already discounted whatever public information there is to know. Price behaves as and when new information comes to light.

Price moves in trends: Trends are an integral part of analyzing the markets via technical analysis. In technical analysis, the price of a security moves in a recognizable trend. When a trend is established, price remains in this trend for prolonged periods of time. Trends change only when there is an external factor (which comes via the fundamental analysis) that acts upon the price.

Price history tends to repeat itself: In technical analysis, price is known to repeat past behavior. This happens as prices tend to trade and thus form various patterns. Each of these patterns are distinct and y analyzing how price behaved when a similar pattern occurred in the past, technical analysis predict how price will behave in the future.

How to use technical analysis?

Technical analysis can be used by studying price itself, the patterns that are formed on the charts or relying upon technical indicators. There are various technical indicators that are in use today.

Some have stood the test of time and have been in use since ages. These technical indicators basically use price as the variable. They are mathematical in nature. Technical indicators are used to measure a number of things. They can range from predicting how price will behave to measuring momentum and to gauge trends in the markets.

Within technical analysis there are many different fields of study. Some of the most common types of technical analysis study includes:

  • Technical indicators – These are primarily mechanical in nature. Traders buy or sell when their indicator signals the same via a trigger
  • Price patterns – Price patterns are basically some of the most commonly occurring patterns on the price chart. By studying the past behavior traders use price patterns and predict whether the price will rise or fall
  • Wave counting – Wave counting is predictive in nature and combines market psychology and certain mathematical concepts. Using waves, traders are able to measure the trends and predict when and where price could reverse

Each of these methods of technical analysis has its own pros and cons and there is no correct way of telling which of the above three approaches are the best. Regardless of the technical analysis approach that is used, the bottom line is that it is primarily a study of the price of the security.

Read 942 times Last modified on Thursday, 04 July 2019 10:59