A Trader's Guide to Technical Analysis of Stocks

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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.

Graph and chart with the words Technical Analysis in the middle

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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