What is Technical Analysis?
In its most basic sense, Technical Analysis (TA) is the observation of price action and volume for forecasting trends in the market and then using that knowledge to try and make money in the future. As it is based on data (i.e. prices) it aims to be as objective as possible. This is as opposed to Fundamental Analysis that involves more subjectivity. Because Technical Analysis involves mostly looking at charts, traders who use it are often referred to as ‘chartists’. Since ideas on analyzing the market first took hold in the 17th century, Technical Analysis has become a mainstream part of financial markets.
So how does it work?
Technical Analysis simply involves finding support and resistance, trend channels or minor (or major) patterns on a price chart. If you can spot a trend before it has ended, then you could be in a good position to make a trade and earn some profit. (traders have a saying: ‘the trend is your friend’!)
Of course, one of the hardest parts of trend spotting is exactly that: trying to work out if a pattern in a chart is actually a trend or not. To help spot these trends, technical analysts have developed a whole bunch of different tools and techniques:
There are certain indicators that may help traders identify these price movements. Whilst some indicators will help to highlight trend changes or continuations, others will simply support your view about the market and give you an extra confirmation. The important thing to do, if you are new to trading, is to try them out, test them on different markets, under different scenarios, until you find a setup that suits you.
All of the most common indicators are addressed separately here in the Skilling Academy.