Technical Analysis Explained
Technical analysis means studying historical price movements on a visual chart and using this information to make trading decisions.
Traders who implement this approach are called technical analysts or technicians.
Technical Analysis Tools
1. Support and resistance
Think of a trendline as a diagonal version of support or resistance. Ascending trendlines are bullish, while descending trendlines are bearish.
3. Candlestick charts
Candlesticks are a price chart that shows the high, low, open, and closing prices for a specified period. The candlestick’s body is determined by the difference between the open and close, and the wicks represent the high and low, respectively.
When the close is above the open, the candle is usually bullish. If the close is below the open, then the candle is generally bearish.
Candlesticks are the best tool when it comes to confirmation and timing trade entries.
Technical indicators are derived from real market data and can provide valuable insights such as the current market environment and overbought or oversold signals.
Indicator example – Bollinger bands
How to use technical analysis
- Analyze the chart and determine your directional bias i.e. do you believe the market will trend or remain range-bound?
- Enter a trade once there is sufficient evidence the market should move along with your bias. Using the methods above, you can develop a checklist of what conditions must be met before entering a position.
Does technical analysis work?
Yes, because market participants see the same picture on the chart, they will usually respond with the appropriate buying or selling.
As long as you trade in the same direction as the big money, you will be profitable.
Remember, as traders, we can never guarantee what will occur, but technical analysis puts the probabilities in your favor.
Technical analysis FAQ
Involves studying historical price movements on a visual chart and using this information to make trading decisions.
Use technical analysis tools such as support and resistance, trendlines, patterns, candlesticks, and indicators.
Yes, the actions of all market participants are reflected in price, which is ordered into tradable patterns through technical analysis. The key is to have a set of objective rules to enter and exit trades.