AN INTRODUCTION TO TECHNICAL ANALYSIS

Technical analysis is becoming an increasingly popular approach to trading, thanks in part to the advancement in charting packages and trading platforms. However, for a novice trader, understanding technical analysis – and how it can help predict trends in the market - can be daunting and challenging.

Technical analysis is the study of price movements in a market, whereby traders make use of historic chart patterns and indicators to predict future trends in the market. It is a visual representation of the past and present performance of a market and allows the trader to use this information in the form of price action, indicators and patterns to guide and inform future trends before entering a trade.

This technical analysis beginners guide will introduce you to the basics of this trading approach, and how it can be used to trade the financial markets.

UNDERSTANDING TECHNICAL ANALYSIS

Technical analysis involves the interpretation of patterns from charts. Trader’s make use of historic data, based primarily on price and volume and use this information to identify trading opportunities based on common patterns in the market. Different indicators are applied to charts to determine entry and exit points for traders to maximize a trades potential at good risk-reward ratios.

The below chart is an example of a chart with the use of the MACD and RSI indicator.

HOW TECHNICAL ANALYSIS CAN HELP TRADERS

Many traders have found technical analysis to be a useful tool for risk-management, which can be a key stumbling block. Once a trader understands the concepts and principles of technical analysis, it can be applied to any market, making it a flexible analytical tool. Where fundamental analysis looks to identify intrinsic value in a market, technical analysis looks to identify trends, which conveniently can be caused by the underlying fundamentals.

Benefits of using technical analysis include the following:

Can be applied to any market using any timeframe

Technical analysis can be used as a standalone method

Allows traders to identify trends in the market