What Is Technical Analysis?
Technical analysis is the use of charts showing historical market data to forecast market trends and predict price movements. Technical information is displayed in graphical charts, updated in real time, which helps the technical trader predict when to buy or sell a given instrument. The trading information presented in financial charts, such as instrument prices, and trading volume, provides the basis for any technical trading strategy.
The Primary Technical Analysis Tools
Technical analysis tools reflect patterns and trends in price movements. To evaluate trends, technical traders look at indicators such as Bollinger Bands®, Fibonacci numbers, moving averages etc. Below is a list of some of the major technical analysis tools.
The Basic Principals of Technical Analysis
Dow Theory, based on principles outlined by Charles Dow, the first editor of the Wall Street Journal, serves as the basis for technical analysis. The theory is founded on three central tenets:
Firstly, price movements are of primary importance. All major market forces are reflected in the price of an instrument. Every market shaping factor, such as political events, market sentiment, or supply and demand is reflected in the changing value of the instrument.
Secondly, prices move according to trends, which allow the technical trader to anticipate future market behaviour.Finally, price movements are cyclic and historical patterns repeat themselves. Technical traders can identify the repetitive behavioural patterns of market participants reflected in financial charts.
The Benefits of Technical Analysis
Technical analysis requires minimal data to provide valuable trading insights. Volume and price can provide the technical trader with all they need to make an informed trading decision.
An experienced technical analyst can follow multiple markets and instruments simultaneously.
Since the primary focus of technical analysis is the identification of trend reversals the question of when to open a trade is clear and straightforward.
Used in conjunction with fundamental analysis, technical analysis tools such as trends, charts and mathematical indicators can offer a panoramic view of the market and lead to a highly effective trading strategy.