Technical Analysis

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Updated: 29 June 2020

Technical analysis helps traders make projections about future price trends in the financial markets. These predictions are based on an examination of trends in historical market data such as asset prices or trading volumes. Technical analysis can also help traders identify potential differences between current market prices and the intrinsic value of an asset. Some investors conduct an analysis of certain assets in the market based economic fundamentals, such as industry trends, price valuation, or corporate revenue. Other traders might focus solely on the market’s price action itself. However, most traders use a combination of both behavioral economics and statistical analysis when making trading decisions, so it is important for all traders to have a clear understanding of how technical analysis techniques are used in practice.

Technical analysis strategies can guide traders with clues about where market trends are likely to travel next. These projections are based on past information but many of the market’s historical price patterns reflect a culmination of events that results in an assets current price valuation.  However, many expert traders will argue that fundamental factors are not always apparent in the current price of an asset because market inefficiencies sometimes lag and this prevents valuations from reaching an appropriate level of accuracy.

Historical Price Charting

Most expert traders will explain that there are two general ways to approach the concept of technical chart analysis: the macro approach and the micro approach. In many cases, day traders will adopt an approach that focuses on some of these factors while buy-and-hold investors might take another approach. The macro approach to technical analysis offers a top-down perspective which looks at the market’s long-term trends in order to make assumptions about where prices are likely to travel during shorter-term trading periods. Conversely, the micro approach to technical analysis might use short-term charts as a signal to establish positions taken as part longer-term trading stance.

Price chart analysis allows traders to identify favorable entrance and exit points for each position. This is a task that can be much more difficult to accomplish using fundamental analysis because price valuations tend to be less specific when long-term economic trends are used as a basis for position structuring. For example, a trader might identify an undervalued asset that is caught in a downtrend and wait for a technical analysis signal (such as a break above the asset’s 50-day moving average) before entering into a long position based on expectations for an upside reversal. Of course, there are many different types of technical analysis signals that can be used to define a trading strategy and this is why it is important for newer traders to spend time learning about all of the various charting techniques experts cite when structuring positions.

Getting Started in Technical Analysis

Different traders might prefer to use different approaches to technical analysis strategy. Some traders might prefer to use volume indicators and simple trend lines when making trading decisions, while other traders might look to establish positions based on chart patterns and technical oscillator readings. Technical traders can also work with automated algorithms to develop entirely new strategies based on requirements that involve combinations of indicators and oscillators to drive trading decisions. Getting started with technical analysis trading involves a few simple steps and the willingness to become familiar with the types of trading strategies that have worked well for expert traders in the past. Here are a few ways to start trading using technical analysis techniques.

First, traders should either learn classical technical analysis strategies or develop an entirely new trading system based on a unique (and personalized) set of requirements. With modern trading systems, both of these approaches are relatively easy to accomplish because all of the common indicators are readily available and expert advisors can set trading order commands for numerical variations or newly developed trading systems. Next, an investor must Identify securities that are both tradable and meet the requirements of the technical analysis strategy that’s been selected. Of course, not all tradable instruments in the market will meet these criteria and this is why a certain level of patience is another characteristic that is essential for those looking to establish a successful trading career.

Finding the best trading brokerage is another critical factor because individual trades are executed through trading accounts. Always choose the best trading account for your individual needs and make sure your broker supports the types of securities that you plan to trade (such as stocks, options, commodities, forex, or cryptocurrencies). Brokers must also provide trade functionality (monitoring and tracking) in its technical indicators that is acceptable for your personal style and level of trading experience (whether it be beginner, intermediate, or advanced).

At the same time, trading costs must be kept to a minimum so that they don’t impact trading profits in a significant way. Once you find a trading platform that works for you, monitoring trade activity becomes much easier and this will allow you to spot more opportunities for profits as you move forward in your trading routines.

Understanding Risk Factors

Trading in the financial markets can be highly lucrative but these environments also contain unique challenges. The best way to avoid common risks in the financial market is to spend time reading through expert trading tutorials and to become familiar with the types of behaviors that produce losses. Technical analysis traders are often well-positioned in terms of their abilities to reduce the potential for loss. Understanding a wide variety of trading strategies can prove to be highly valuable for anyone that is interested in day trading or actively managing assets through an investment portfolio. Most investors are able to leverage technical analysis and fundamental analysis in combination with one another.  Traders that use technical analysis strategies in a consistent way will often argue that chart patterns can help to fill the knowledge gaps that are encountered by traders that focus solely on technical analysis. By developing a clear understanding of the ways traders utilize technical analysis, it is often possible to limit trading losses and maximize risk-adjusted gains while finding new trading opportunities that might not have been apparent using fundamental analysis on its own.