Technical analysis is a tool or a process that uses market data to forecast an underlying asset’s likely future price movement such as a stock or currency pair.
The principle underlying technical analysis’s validity is the idea that all market participant’s aggregate activities – which is buying and selling – accurately represent all relevant information relative to a traded security and hence consistently assign a fair market value to the security.
What Is Technical Analysis?
Technical analysis is a method of analyzing and predicting the direction of prices in financial markets by using historical data, mainly price and volume. Technical analysts use various tools and techniques, such as charts patterns, indicators, and trading rules, to identify trends, support and resistance levels, overbought and oversold conditions, breakouts and reversals, and other signals that can help them make trading decisions.
Technical analysis can be applied to any security that has price data over time, such as stocks, bonds, commodities, currencies, and derivatives. Technical analysis can also be used for different time frames from intraday to long-term trades.
Some of the benefits of technical analysis are that it can help traders to identify trading opportunities in any market conditions to manage risk and reward by using stop-loss orders and profit targets to enhance their market timing and entry and exit points and to develop their own trading style and strategy.
Stock Market Technical Charts
A price chart is a series of prices plotted over a given period of time. Technical charts can be created using any security that has price data over time.
Technical charts can be in the form of candlestick, hollow candles, line charts, point and figure charts,etc.
Price Action Concepts
In this particular website I have covered a lot of price actional concepts like candlestick patterns, chart patterns, etc but if I have to summarize price action into smaller and simpler terms then price action refers to the action that has been taken by the price. Let’s try to understand this with the help of an example, if the price of an asset moved from $100 to $200 then the movement that the price has done between this time is known as price action. This includes impulse and correction phases, change in minor trends, etc.
Indicators of Technical Analysis
In order to make things simple people use indicators to make their trading and investing journey more secure and reliable. Not only this, indicators are a great way to filter out your trades and initiate more confirmed trades. If your trade is being confirmed by a lot of different things then the probability of getting correct increases which improves your accuracy in the stock market or any other markets.
There are basically two types of indicators:
- Leading Indicator
- Lagging Indicator
I have already covered this concept in the indicator article so, if you want a brief and detailed explanation you can read that article.
Other Technical Analysis Concepts
- Trend Lines
In order to identify and trade in the favor of major trends, technical analysts use trend line concepts.
A straight line or an angular line is a trend line. It joins two or more price points and then continues into the future to serve as a support or resistance line. Trend lines are particularly beneficial for stock technical analysis.
- Support and Resistance
Resistance and Support are important levels or important prices in a particular asset where buyers and sellers are interested in buying or selling the asset. These levels are also known as demand and supply areas.
- Volume
Volume in the stock market is an indicator which measures the number of stocks traded over a specified period of time. It involves the buying and selling of an underlying asset. It also indicates the level of activity and liquidity of a security. It can also help traders to identify the strength and significance of price movements.
Conclusion
Technical analysis is an extremely profitable and useful concept which can actually change a trader and investor’s investment decision. Using and mastering technical analysis can greatly improve your entry and exit levels and also improve your investment decisions but remember great things take time so, working consistently on price actional and technical analysis concepts will surely generate you better results.