When you first enter the trading world, you have to pick a market forecasting methodology that fits your trader profile and trading plan. Fundamental analysis and technical analysis are among the most popular ways to analyze the markets.
While fundamental analysis is all about uncovering the intrinsic value of an asset by taking into account its fundamentals, technical analysis is all about analyzing the price action of an asset to determine its future direction.
Let’s focus on technical analysis in this article.
But before we dive in, remember that to be able to apply your trading plan and strategy in the best conditions, and access all the markets you want to trade, you will need to use powerful, reliable, and flexible trading platforms. TradingView is one example of a technical analysis provider that integrates with a range of brokers for trading. To pick the best one for you, you will have to first list all your trading needs.
What is technical analysis?
As we said earlier, technical analysis relies on charts and price action to identify buying and selling signals through price and chart patterns, as well as technical indicators.
For technical analysts, prices are all that’s needed to find out which direction an asset is going in, because prices – according to technical analysis theory – instantly take into account all relevant available information, thus price is the only needed data to analyse. This, combined with the idea that history tends to repeat itself, forming key price levels like support and resistance, is the core of technical analysis.
Another important premise of technical analysis is that prices always move in trends. An asset can follow three different types of trends:
- 1) uptrend – where the markets are moving upwards, forming higher highs and higher lows,
- 2) downtrend – where the markets are moving downwards, forming lower highs and lower lows, and
- 3) neutral trend – where markets move sideways because neither the buyers or sellers are in control.
What are the different types of charts?
Because charts depict the price action of the analyzed assets, they are a key tool for technical analysis. It’s also important to know that there are many different types of charts you can use, but you should know that 3 types are most common for every kind of trader:
- 1) line chart – the most basic type of chart used to spot trends, as it represents an asset’s historical price action with a continuous line,
- 2) bar chart – a vertical line, representing the highest and the lowest price on the period, with two horizontal lines, attached both on the left and the right-hand side, representing respectively the opening price and the closing price, and…
- 3) candlestick chart – another type of OHLC chart (Open, High, Low, Close) represented this time by a candle (open and close prices) with shadows or wicks (the highest and lowest price).
What are the most used technical tools?
Technical indicators focus on historical asset data, such as volume, price, and open interest, to analyze the trading activity of the given asset and spot the best entry and exit points.
Central to technical analysis are two types of technical indicators you can use on trading platforms:
- 1) overlays – indicators that are plotted over the prices directly on a chart, and
- 2) oscillators – indicators moving around two levels usually placed below the chart.
You can also class technical indicators in different categories according to the type of information they provide.
There are 1) momentum indicators, which reflect the strength and speed of a price movement such as the Advance Decline Line or the ARMS index, the 2) trend indicators, which indicate the dynamics of the market and the price trend, like the moving averages and the Parabolic SAR, the 3) volatility indicator, which indicates the nervousness and indecision of market participants like the Bollinger Bands and the Average True Range, and the 4) volume indicators, which shows the level of trading activity of a specific asset like the On Balance Volume and the money flow index.
You now have a better understanding of what technical analysis is and which kind of tools you can use. Remember to itemize every part of your trading strategy based on technical analysis in a trading plan that will guide your trading process and avoid having your emotions take over.