2. Technical Analysis
• Technical analysis is a trading discipline employed to evaluate
investments and identify trading opportunities in price trends and
patterns seen on charts.
• Technical analysts believe past trading activity and price changes of a
security can be valuable indicators of the security's future price
• Technical analysis may be contrasted with fundamental analysis,
which focuses on a company's financials rather than historical price
patterns or stock trends.
3. History of Technical Analysis
• Technical analysis was first introduced by Charles Dow in the 1800s,
and the most prominent stock index, the Dow Jones Industrial, is
named after the man who popularized the discipline.
• Since Dow, several important figures have since contributed to the
study and designed a number of tools, indicators, theories, and
4. Facts About Technical Analysis
Here are the most important facts about technical analysis. Traders
should focus on these key areas to learn how to do technical analysis on their
own, and develop the analytical eye necessary to forecast price movements
ahead of time.
1. Price Considers Everything
Price action is driven by a variety of factors, such as the basic balance
between supply and demand, the emotional state of traders, news, rumors,
and more, as well as external actors such as politics, weather, and others.
These factors will cause the price of an asset to rise or fall, depending on how
the market participants react to certain events and changes in the overall
5. 2. Price Movement Delivers The Trend
Regular increases or decreases in a market form a trend, and the price typically
follows in that trend direction until something significant occurs that changes
the said trend. A dramatic news event, a major disruption to supply and
demand, and other factors often suggest a trend change is possible.
Once a trend change is confirmed, traders should look to alter their technical
analysis and trading strategies accordingly. The trend is your friend.
3. History Repeats Itself
Markets are also cyclical, and history often repeats itself. Many traders include
time, and important dates into their technical analysis.
There’s a theory called the Halloween effect that urges traders to buy up an
asset in anticipation of an increase occurring during the winter months, while
the term “sell in May and go away” speaks to assets typically in decline during
the wearer summer months when market interest wanes.
Markets also go through bear and bull cycles, and much more.
6. Technical Analysis Tools
Using a few basic principles and tools, anyone can learn technical
analysis and in no time become an expert themselves. Familiarizing
oneself with the meaning of the below terms will be an important first
Trend lines are lines drawn on a price chart of an asset, just under or
over the asset’s local pivot highs or lows, to indicate that price is
following a particular direction. These lines exist based on the natural
placement of buy or sell orders by market participants, and the raising
or lowering of stop loss levels, or where natural profit-taking may occur.
7. 2.Support and Resistance Levels
• support and resistance levels can either be horizontal, or diagonal.
Trendlines often rise and fall, and represent diagonal support or
resistance. Horizontal resistance or support are often prices that
represent a historic level or are a significant rounded number.
• Support is a level on price charts in which price has typically
rebounded from in the past and could provide yet another bounce if
the price gets there and buyers step in.
• Resistance is a level on price charts in which price has typically been
rejected from, representing an area of interest for sellers to begin
8. 3.Moving Averages
• Moving averages are an indicator layered over price charts that
represents the average price of an asset across a certain time period.
Moving averages can be short- or long-term, across daily, weekly, or
even longer timeframes.
• Investors and traders typically use moving averages not only to find
levels that may act as support or resistance but to understand if a
trend in an asset class is changing.
9. 4.Trading Volume
• Trading volume is another extremely important tool for traders to use
to determine interest in an asset. Volume typically proceeds price
action, and keen-eyed technical analysts can often spot trend changes
in the price of an asset by watching trading volume.
• Trading volume also is used to confirm the validity of a movement.
Oftentimes, an asset will break down or up, but volume doesn’t
follow, suggesting buyers or sellers are hesitant and uncomfortable
with taking an actionable position. However, if the same movement
occurs with strong volume, chances are that much higher for the
move to be valid, and not result in a fakeout.
10. 5. Chart Patterns
• One of the most helpful tools a trader can use when performing
technical analysis is to watch for certain patterns to appear on price
charts before taking a position. Using trend lines, technical analysis
can draw triangles and other geometric shapes on price charts.
• If an asset trades within one of these patterns, detailed statistical
analysis has been performed that suggests certain patterns will break
in one direction over another, providing traders who spot such
patterns an advantage in the market.
• Japanese candlesticks were introduced to assist technical analysts and
traders in getting tipped off of upcoming price movements.
Depending on how a candlestick opens, closes, and the price action
within each candle can cause a candlestick to close in a particular
shape or pattern.
• These shapes or patterns of candlesticks can also be used to predict
future price movements. A Doji, for example, is a type of candlestick
pattern that often tells analysts that there is indecision in the market,
and a trend change could soon occur.
• In addition to volume, other helpful indicators have been developed
to add to a trader’s arsenal and offer even more changes to
determine future price movements before they occur.
• Commonly used indicators include the Stochastic Oscillator, Bollinger
Bands, the Acceleration Deceleration indicator, and the MACD – the
Moving Average Convergence Divergence indicator.