What does the term “technical analysis” mean?
Technical analysis is a method or technique for predicting the likely future price movement of a security, such as a stock or currency pair, using market data.
Technical analysis’ validity is founded on the assumption that all market participants’ aggregate activity – buying and selling – accurately reflect all relevant information about a traded asset and, as a result, assign a fair market value to the security on a continuous basis.
Price Trends as a Predictor of Future Outcomes
Technical traders believe that the most reliable predictor of future price action is the market’s current or historical price behaviour.
Technical analysis is used by a wide range of people, not just technical traders. Many fundamental traders use fundamental analysis to determine whether to buy into a market, then use technical analysis to determine optimal, low-risk buy entry price levels once that choice has been made.
Technical traders examine price charts in order to forecast price movement. The two most significant parts in technical analysis are the time frames that are studied and the technical indicators that a trader chooses to use.
On charts, technical analysis time frames can span from one minute to monthly or even years. Some of the most typical time frames used by technical analysts are as follows:
5 minutes of charting
15 minutes of charting
4-hour graph hourly graph
The day’s chart
The time range in which a trader studies is usually determined by his or her personal trading technique. Intra-day traders prefer to study price movement on shorter time frames, such as the 5-minute or 15-minute charts, because they open and close trades in a single trading day.
Long-term traders who hold positions overnight or for extended periods of time are more inclined to evaluate markets using hourly, 4-hour, daily, or even weekly charts.
Price fluctuation that occurs inside a 15-minute time window can be fairly substantial for an intra-day trader looking to profit from price swings that occur during one trading day. However, on a daily or weekly chart, the same price movement may not be as notable or indicative for long-term trading goals.
It’s simple to demonstrate this by looking at the same price movement on multiple time frame charts. The price of silver is trading in the same range as it has been for several months, at $16 to $18.50 on the daily chart below. A long-term silver investor might be enticed to buy silver since the price is so close to the low end of that range.
Candlestick charting is the most common way of depicting price movement on a chart. A candlestick is generated by the price activity over a specified time period for each time frame. Each candlestick on an hourly chart reflects the price action for one hour, while each candlestick on a 4-hour chart represents the price activity for each 4-hour time period.
In addition to analysing candlestick formations, technical traders can utilise an almost infinite variety of technical indicators to assist them in making trading decisions.
Moving averages are, without a doubt, the most widely used technical indicator. Many trading strategies employ one or more moving averages. A simple moving average trading strategy would be “buy as long as price remains above the 50-period exponential moving average (EMA); sell as long as price remains below the 50 EMA.”
Many traders utilise daily pivot point indicators to determine entry and exit price levels.
Daily pivot point indicators are widely used by traders to suggest price levels for entering and leaving trades. In addition to the pivot point, these indicators usually identify a number of support and resistance levels. Pivot point levels are widely used to represent significant support or resistance levels, as well as levels where trade is contained inside a range. Many traders consider trading that soars (or plummets) over the daily pivot and all accompanying support and resistance levels to be “breakout” trading, in which market prices move dramatically higher or lower in the breakout direction.
It’s critical to keep in mind that no technical indicator is perfect. None of them routinely produce 100 percent correct indications.
The most savvy traders are always looking for signs that the signals given by their chosen indicators are incorrect. When used correctly, technical analysis can greatly boost your trading profits. Spending more time and energy thinking about what to do if the market turns against you, rather than fantasising about how you’ll spend your millions, may help you enhance your trading results.
If you wish to learn more about technical analysis, check out this course by FinLearn Academy on Technical Analysis which takes you through the basics of the candlestick chart patterns and helps you master the profitable strategies to make successful stock decisions.