What Is Technical Analysis?

Technical analysis is the use of historical market data to predict future price movements. Using insights from market psychology, behavioral economics, and 澳洲幸运5官方开奖结果体彩网:quantitative analysis, technical analysts aim to use past performance to predict future market behavior. The two most common forms of 澳洲幸运5官方开奖结果体彩网:technical analysis are chart patterns and 澳洲幸运5官方开奖结果体彩网:technical (statistical) indicators.

Understanding Technical Analysis

Technical analysis is a blanket term for a variety of strategies that depend on interpretation of price action in a stock. Most tec🦄hnical analysis is focused on determining whether or not a c𝓡urrent trend will continue and, if not, when it will reverse.

Some technical analysts swear by 澳洲幸运5官方开奖结果体彩网:trendlines, others use candlestick formations, and yet others prefer bands and boxes created through a mathematical visualization. Most technical analysts use some combination of tools to recognize potential entry and exit points for trades. A chart formation may indicate an entry point for a short seller, for example, but the trader will look at moviඣng꧂ averages for different time periods to confirm that a breakdown is likely.

A Brief History of Technical Analysis

The technical analysis of stocks and trends has been used for hundreds of years. In Europe, Joseph de la Vega adopted early technical analysis techniques to predict Dutch markets in the 17th century. In its modern form, however, technical analysis owes heavily to 澳洲幸运5官方开奖结果体彩网:Charles Dow, William P. Hamilton, Robert Rhea, Edson Gould, and 澳洲幸运5官方开奖结果体彩网:many others—including a ballroom dancer name🐼d Nicolas♎ Darvas.

These people represented a new perspective on the market as a tide that is best measured in highs and lows on a chart rather than by the particulars of the underlying company. The diverse collection of theories from early technical analysts were brought together and formalized in 1948 with the publishing of Technical Analysis of Stock Trends by Robert D. Edwards and John Magee.

Candlestick patterns date back to Japanese merchants eager to detect trading patterns for their rice harvests. Studying these ancient patterns became popular in the 1990s in the U.S. with the advent of internet day trading. Investors analyzed historical stock charts eager to discover new patterns for use when recommending trades. Candlestick reversal patterns in particular are critically important for investors to identify, and there are several other commonly used candlestick charting patterns. The doji and the engulfing pattern are all used ꧟to predict an imminent bearish 🐎reversal.

How to Use Technical Analysis

The core principle underlying technical analysis is that the market price reflects all available information that could impact a market. As a result, there's no need to look at economic, fundamental, or new developments since they're already priced into a given security. Technical analysts generally believe that prices move in trends and history tends to repeat itself when it comes to the market's overall psychology. The two major types of technical analysis are chart patterns and technical (statistical) indicators.

Chart patterns are a subjective form of technical analysis where technicians attempt to identify areas of support and 澳洲幸运5官方开奖结果体彩网:resistance on a chart by looking at specific patterns. These patterns, underpinned by psychological factors, are designed to predict where prices are headed, following a breakout or breakdown from a specific price point and time. For example, an 澳洲幸运5官方开奖结果体彩网:ascending triangle chart pattern is a bullish chart pattern that shows a key area of resistance. A brea🗹kout from this resistance could lead to a significan꧃t, high-volume move higher.

澳洲幸运5官方开奖结果体彩网:Technical indicators are a statistical form of technical analysis where technicians apply various mathematical formulas to prices and volumes. The most common technical indicators are moving averages, which smooth price data to help make it easier to spot trends. More complex technical indicators include the 澳洲幸运5官方开奖结果体彩网:moving average convergence divergence (MA𝐆CD), which looks at the interplay between several moving averages. Many trading systems are based on technical indicators♏ since they can be quantitatively calculated.

The Differ𓄧ence Between Technical Analysis and Fundamental Analysis

澳洲幸运5官方开奖结果体彩网:Fundamental analysis and technical analysis are the two big factions in finance. Whereas technical analysts believe the best approach is to follow the trend as it forms through market action, fundamental analysts believe the market often overlooks value. Fundamental analysts will ignore chart trends in favor of digging through the balance sheet and the market profile of a company in search of intrinsic value not currently reflected in the price. There are many examples of successful investors using fundamental or technical analysis to guide their trading and even those who incorporate elements of both. On the whole, however, technical analysis lends itself to a faster investing ꧅pace, whereas fundamental analysis generally has a longer decision timeline and holding period by virtue of the time required for the extra due diligence.

Limitations of Technical Analysis

Technical analysis has the same limitation of any strategy based on particular trade triggers. The chart can be misinterpreted. The formation may be predicated on low volume. The periods being used for the moving averages may be too long or too 🙈short for the type of trade you are looking to make. Leaving those aside, the technical analys🍨is of stocks and trends has a fascinating limitation unique to itself.

As more technical analysis strategies, tools, and techniques become widely adopted, these have a material impact on the price action. For example, are those 澳洲幸运5官方开奖结果体彩网:three black crows forming because the priced-in information is justifying a bearish reversal or because traders universally agree that they should be followed by a bearish reversal and bring that about by taking up short positions? Although this is an interesting question, a true technical analyst doesn't actually care as long as the trading model continues 𝓡to work.

Further Reading

Investopedia has several articles and tutorials on the topic of technical analysis. Follow the links to articles in this journey on the menu bar to the left ofܫ this page. In addition, for further reading you may want to check ou🥃t the following:

• 澳洲幸ﷺ运5官方开奖结果体彩网:Technical Analysis Strategies for Beginners
• 澳洲幸运5官方开奖结果体彩网:Best Ways to Lea🥀rn Technical Analysis
• ♔澳🐼洲幸运5官方开奖结果体彩网:Top 7 Books to Learn Technical Analysis
• 澳洲幸运5官方开奖结果体彩网:Intro🐻duction to Technical Analysis Price Patterns
• Fundamenta🔯l vs. Technicalᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ Analysis: What's the Difference?
• 澳洲幸运5官方开奖结果体彩网𝐆:Debunking 8 Myths About Technical A♓nalysis
• 澳洲幸运5官方开奖结果体彩网:Is Technical Analysis a S༒elf-Fulfilling Prophecy?
• 澳洲幸运5官方开奖结果体彩网:Top Te♈chnical Analysis To🥃ols for Traders

The Bottom Line

Technic🌸al analysis refers 🤪to a variety of methods to forecast future price movements in an asset or security. By watching chart patterns and sentiment indicators, these traders hope to anticipate the behavior of the wider market.