Technical analysis is the study of historical price action in order to understand and identify different patterns and in order to determine the probable future direction of price.
By using technical analysis, traders study underlying security or market price movement typically displayed graphically in charts.
The simple logic behind the analysis is that a market participant can look at historical price movements in order to determine potential price movement within the current market conditions.
Those who use technical analysis are referred to as technical analysts or traders. They believe that it’s all in the charts, you need not look at anything else.
Here are the main assumption of technical analysis;
- All known fundamental information is priced into the current market price of a given stock. It’s also referred to as “The market discounts everything”.
- History tends to repeat itself. This means past trading activity and price changes of a security can be valuable indicators of the security’s future price movements. Technical analysts use chart patterns to analyse the emotion behind the move and subsequent market movements to understand trends.
- Price moves in trends
Professional analysts often use technical analysis in conjunction with other forms of research such as fundamental analysis.
Many technical analysts prefer to trade fundamentally good stocks by applying their technical analysis skills.
Here are few important indicators technical analysis look at before taking a trade;
- Trends
- Chart patterns
- Volume
- Momentum indicators
- Oscillators
- Simple and exponential moving averages
- Support and resistance levels
- Channels