Every trader and investor has heard of the term technical
analysis. Most of the time, it’s used with the term fundamental analysis as examples for the various tools traders can use when navigating
the financial markets.
We’ll now be discussing the basic information about
technical analysis; what it is and how it is normally used.
What is Technical Analysis
Technical analysis is a trading tool used for evaluating
securities while attempting to obtain an accurate forecast of their future
movement. This can be achieved by analyzing the statistics gathered from
various trading activities which include price movement and volume. It can also
be understood as the study of supply and demand forces as reflected in the
security’s market price movements.
It was formed out of the basic concepts seen from the Dow
Theory, which observes the trading market movements coming from the early
writings of Charles Dow. The underlying assumptions of technical analysis are
as follows: #1 market price overlooks every factor that have the chance to
influence the price of a security; and #2 market price movements are not
entirely random, in fact, it moves in discernible patterns and trends that
repeats over time.
Technical analysts focus on charts of price movement and
various analytical tools when attempting to evaluate the strength or weakness
of a security as well as forecast the possible price changes in the future. Fundamental
analysts on the other hand attempt to evaluate the intrinsic value of a
security.
Analysts relying on technical analysis usually believe that past
trading activity and price changes of a security are better indicators of likely
future price movements as opposed to analyzing the intrinsic value of the
security.
How Technical Analysis is used
Technical analysis is used when attempting to forecast the
price movement of almost any tradable instrument in the market. It is commonly
subject to the forces of supply and demand, which includes stocks, bonds,
futures, and currency pairs. Most of the time, this type of analysis is used on price changes,
but there are also some analysts who track other numbers such as trading volume
or open interest figures.
Some of the most popular technical indicators include
trendlines, moving averages, and momentum indicators like the moving average
convergence divergence (MACD) indicator. These technical indicators have been
developed over the years to try and accurately predict future price movements. Some
are solely focused on identifying the strength of a trend and how likely it
will continue.
Conclusion
There are different ways to obtain accurate forecasts of the
possible price movements of securities. You just have to determine whether
using technical analysis is the choice that fits you best. Learn as much as you
can about the different forms of analyses and then decide which the right one
for you is.
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