What is Technical Analysis?

Technical analysis is a process where analysts and traders try to forecast future price movements through the study of historical market data. A range of data groups can be used, but trading volumes, moving averages and price history itself are generally given most consideration. Technical analysis can be applied to any instrument or market which generates sufficient data points. So if you are overlaying annotative tools onto charts depicting price history in crude oil and price history in GBP / EUR you would be agnostic to the fundamental qualities of either instrument. A commonly used tool is the candlestick pattern chart. These give an immediate indication of price history over a given (and adjustable) period of time. The patterns that the candlesticks themselves form are taken as signs of where price is heading next; they even have their own names such as ‘Three stars in the South’. Technical analysts find signals in various places. There may be certain price levels that price struggles to break through. The ‘strength’ of these resistance and support levels being correlated to the number of times they successfully act as a barrier to price movement. Increased trade volumes, when associated with a move in price, are seen as confirming the strength of that break-out. The logic behind the argument being that during that period a greater number of market participants were involved in the trading activity so the resultant signal, whether upwards or downwards, is the consensus opinion of a larger number of people. The simple moving average (SMA) price over a particular time period, say for example 50, 100 or 200 days, can be seen as a line of support or resistance. Furthermore, one moving average crossing another is another sign that technical analysts refer to. Many traders make consistent profits using only technical analysis. There are other schools of thought on what the best approach is to invest, and proponents of Fundamental Analysis would willingly argue the case for their approach. Whilst it might not be a trading methodology that appeals to all, the tools used are very useful in terms of explaining what the market is ‘saying’ to you.