- Technical analysis is a method of examining historic market data to identify patterns and trends that may help predict future market behaviour.
- It is based on the idea that markets are driven by human psychology, which tends to repeat itself over time.
- Charts are used to visualise past market data and identify potential trade setups.
What is Technical Analysis?
Technical analysis is a method for examining historical market data (primarily price and volume) to identify patterns and trends that may help predict future market behaviour. Traders use this information to develop trading strategies and make informed decisions about when to buy or sell.
The Basics of Technical Analysis
Perhaps the most basic concept in technical analysis is that prices move in trends. This means that once a trend has been established, it’s more likely to continue than to reverse. Trends can be either upward (bullish) or downward (bearish), and can vary in length from short-term to long-term. By identifying these trends as early as possible, traders can position themselves to make profits.
Charts for Technical Analysis
Another key aspect of technical analysis is the use of charts. These visual representations of past market data allow traders to analyse price action over time and identify patterns that may indicate buying or selling opportunities. Charts can be customised with various indicators and overlays that provide additional information about market conditions and potential trade setups.
Market Psychology & Trend Identification
At its core, technical analysis is based on the idea that markets are driven by human psychology, which tends to repeat itself over time. By studying past price movements and identifying patterns that have historically led to certain outcomes, traders can gain insights into where the market may be headed next. For example, imagine that a stock has been fluctuating between $50 and $60 per share for several months. If a trader sees that the stock has repeatedly bounced off its support level at $50 without breaking through, they may decide to buy when it reaches that level again based on the assumption that it will continue the pattern.