Technical analysis is the study of securities prices and market activities over the markets past performance and present tendencies, primarily by the use of charts, which makes possible the forecasting of future market activities.
Technical analysis is a concept used by many investors and professionals to identify where stock prices may head on the basis of past performance. The idea with technical analysis is that a security’s current market price reflects all relevant information impacting the stock and therefore price movements over the recent past can give clues to predict where the security will head in the future. Traders and investors use a variety of tools and techniques to study historical price movement, identify key trends and take advantage of opportunities that the markets may present.
Though there is no guarantee that its predictions will be accurate, the goal of technical analysis is to give an investor insight into their investment options and help them make better decisions. Technical analysis is a comprehensive art, enabling investors to make more informed decisions and see exactly how much support a security has at different prices, how volatile a security’s performance can be and other important characteristics. Technical analysts look at contracts of stocks, commodities, indices, and currencies.
The most common technical analysis tool used by investors and traders is called chart analysis. Charts are used to plot historical data points to identify trends, support and resistance levels, and other important trends that may appear. Most charting software is equipped with various technical indicators, which introduce predetermined calculations and patterns to the chart. Investors use these indicators to time entry and exit points for trades, and for other various purposes.
Another common tool investors use is called the Moving Average Convergence Divergence, commonly known as a MACD. This tool generates trends for stock prices and helps investors become familiar with the current price action of their security of choice. The MACD is composed of a signal line, which plots the difference between two moving averages and shows the convergence and divergence of different trends. Investors can then use the signal line to signal buy and sell opportunities.
Some popular technical analysis tools that investors use are Relative Strength Index (RSI), Fibonacci breakouts, momentum indicators, candlestick patterns, support/resistance levels, and trendlines. Depending on the security and trader’s goals, different tools can be mixed and tailored to suit their needs.
The most important factor of technical analysis is the recognition of market cycles. Market cycles are present in the form of trends, which can be seen in price action and volume, and investors use these cycles to seek out profits. Investors familiar with charting patterns often use technical analysis to time entry and exit points for trades, as some chart patterns can signal a strong buy/sell environment. Other chart patterns can also be used to determine possible reversals, as well as other opportunities.
Overall, technical analysis is a tool used by investors to make trading and investing decisions by identifying trends and market cycles. Technical analysis is best used in conjunction with other forms of analysis, such as fundamental, but the advantage of technical analysis is that is can provide investors with insight about a market’s current trend and can serve as a tool to anticipate future market activities. Investors who are comfortable using technical analysis often look to it to offer them an edge to be better informed and to make quicker and better decisions when compared to investors who rely solely on fundamentals.
