Understanding Technical Analysis

What is technical analysis?

Reading price charts is a key component of the technical analysis approach to spotting trading opportunities. These charts are used by technical traders toforecastmarketdirectionaswellaspotentialentryandexitpointsforeach position.

The basis of technical analysis

Notraderpossessesacrystalballtheycanusetopredictwhatwillhappenin themarketsinthefuture.Instead,theyevaluatetheriskvsthepotentialprofit ofthetradebyusingtheinformationathandtomakeaneducatedbet about thefuturepriceactionoftheirchosenasset.

Technical traders believe that a market's price chart has all the information necessarytopredictthemarket'sfuturedirection.

Key concepts of technical analysis

Therearehundredsoftradingtoolsthatatechnicaltradercanutilize,butitall boilsdowntoidentifyingsupportandresistance,trends,andranges.

Support and resistance

Support and resistance are areas on a market’s chart that it has difficulty breakingpast.Ifamarketreachesitssupportorresistancelevel,thenaprice reversalmaybeonthecards.

Trends and ranges

Markets can only be in three states:

An uptrend, when prices are rising overall

A downtrend, when prices are falling overall

A range, when prices are stuck between support and resistance

By using indicators and patterns, technical traders aim to spot when new trends are forming.

Technical analysis vs fundamental analysis

Technical analysis is one of the two main ways in which traders analyze the market; the other is fundamental analysis. They represent very different methodsforassessingassetsandfindingnewpositions.

Technical analysis involves looking purely at market prices and patterns, ignoringallotherdata

Fundamental analysis involves researching what is driving market price action,takingearnings,economicdata,andmoreintoaccount.