How Does Technical Analysis Work?

Bryan Jackson March 9, 2018 Comments Off on How Does Technical Analysis Work?
How Does Technical Analysis Work?

You might have heard about technical analysis. Many investors who want to be precise and don’t want to be fooled by the market are doing this, guided by expert Forex Broker Review and HQBroker Online Reviews . And many new and inexperienced traders are advised to study this if they want to make a name for themselves in the world of trading. How does technical analysis work? We’ll answer that in a bit. But first…

What is Technical Analysis?

In simple words, technical analysis is the study of data from the market as well as from the actions of market participants. The data that we gather include price levels that have been considered as turning points in the past. They also include the amount of stocks that investors buy and sell each day—this is called the volume. We also take the rate of price movement changes—this is called the momentum—over a period of time.

Technical analysis sports a high contrast to fundamental analysis, which aims to uncover the true value of a stock. Fundamental analysis depends on future sales, earnings, and cost estimates of a company. These generally change as circumstances change. Meanwhile, technical analysis inputs never change even as circumstances change. We never revise charts.

How Does It Really Work?

Even if some people say that technical analysis is no better than forecasting the future by looking at one’s palms, what technical analysis is able to do is to decide a trade move based on real probabilities.

These probabilities are derived from charts, which the chart watcher monitors to seek patterns. Based on the movements in the chart, we can predict the next move of the market. Although it does not work all the time, the past data nevertheless gives investors ideas of what will happen next.

In addition, chart watching can tell us if there’s something wrong in the market’s mood. For instance, if prices move upwards from the triangle pattern in the chart and then slides back within that pattern, we can get the idea that there must be something wrong in our original decision to buy. It may mean we missed something important or the market simply changed its mind.

The Theory

Chart analysis is relatively easy. Even if professional technical analysts have hundreds of tools that they can use, they basically follow three basic steps.

First, they see where the stock is trading at present and find out how it got to that level. Second, they determine the power of a trend while making comparisons in the market. Lastly, it checks its own industry and its own history.

If you plan to do this, you need some key technical tools.

  • Trends and trendlines – so you can find a trend.
  • Support and resistance – so you can see prices levels bringing our buyers and sellers.
  • Moving averages – so you can watch average prices over 50- and 200-day periods. This will help you distinguish trends more easily.
  • Volume and momentum – so you can confirm the health of a trend and warn if there’s an impending change.
  • Relative performance – so you can find the ratios of stock performance to a relevant market index or industry group.

Bottom Line

The thing about technical analysis is that it’s not really that “technical.” So if you think you’re going to have a hard time wrapping your head around this process, think again. If you want to become a sharp investor, you must learn how to properly do technical analysis.

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