The objective of technical analysis in any setting and context is to identify trends and price patterns. Particularly in the financial markets technical analysts try to find these patterns in order to exploit them through making better educated trades. It’s important to note that there are a wide variety of ways to analyze and monitor trends but the most popular way is through studying price charts. The main reason to use technical analysis is to find the best times to trade for maximum gains (and to avoid losses). Many people spend thousands of dollars on professional training and material to learn how to be more proficient in this practice, but hopefully this introduction to technical analysis can help shed some light on the basics.
Technical Indicators – Since analysis of patterns relies on “flags” or “indicators” to predict patterns and market behaviors, technical indicators are a popular way of forecasting the markets. The advantage of using indicators is the abundance of information they provide. You can find out the momentum and volatility among many other factors in regards to the market-all of which is extremely valuable information that impacts trading decisions.
Trend Lines – The advantage of using trend lines are that you can look at the history of the market and predict its future based on which way the trend lines are pointing. This form of analysis doesn’t necessarily get the best results every single time, but it gives the person doing it a much better idea of the likelihood of a market behavior. To make it as simple as possible to understand, using trend lines just gives you the general direction of the market and its possible future direction if the trend continues. There are up-trends, down-trends and sideways trends.
Support and Resistance – This is a form of predicting which way the currency price is going to move in a market. The support would lie beneath the price on a chart while the support would be over the price. These are basically the same type of analytics used in basic trend lines as mentioned above. The strength of these lines is important more than anything else and depending on the strength you can fairly accurately make predictions about the market.
It’s important to note in an introduction to technical analysis that history and old data is extremely valuable and necessary for the analysis to work well. The more data you have the better you can predict the future behavior through various techniques. This form of analysis isn’t just for the stock market, it can be used anywhere there is old trading data like in Forex or Commodities for example.
There are many advanced forms of technical analysis like Elliot wave theory and Dow Theory and depending on how you choose to analyze data there is ample material based on proper procedure and practice. Additionally for further information on how to do technical analysis properly there are free online tutorials and guides that can be downloaded straight to your computer free of charge.
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