Technical analysis (TA) is a method used in financial markets to evaluate and forecast future price movements of securities such as indices, stocks, bonds, commodities and currencies. It involves studying historical market data, primarily focusing on prices and volume patterns to identify trends, patterns and signals that can help analysts to predict future price movements of stocks.
Simply, Technical analysis is a method of evaluating securities such as stocks, currencies, bonds and commodities by analyzing statistics generated by market activities such as price and volume. The goal of technical analysis is to identify trends and patterns to evaluate and forecast future price movements.
Technical analysts believe that market trends, patterns and price movements are driven by human behavior and that past performance can be used to forecast future price movements of stocks. It's uses a variety of tools and techniques such as charting, trend lines, moving averages and technical indicators to analyze market data and identify potential trading opportunities in future.
Common tools and techniques used in technical analysis:
Trend lines: These are lines drawn on a price chart to identify the direction of the market trend. They can help determine whether the price is moving upwards (bullish) or downwards (bearish).
Support and resistance levels: These are price levels at which the security has historically had difficulty moving below (support) or above (resistance). They are used to identify potential buying or selling opportunities.
Chart patterns: Various patterns, such as head and shoulders, double tops/bottoms, triangles, and flags, can provide indications of future price movements.
Indicators: Technical analysts use mathematical calculations applied to historical price and volume data to generate indicators. These can include moving averages, oscillators (e.g., Relative Strength Index - RSI, Moving Average Convergence Divergence - MACD), and momentum indicators, which help assess the strength and momentum of price trends.
Volume analysis: The volume of trading activity is often analyzed alongside price movements. An increase or decrease in volume can provide insights into the strength or weakness of a price trend.
It is important to note that technical analysis (TA) is based solely on historical price and volume data, and does not consider fundamental factors such as company earnings, news events or other economic indicators. Therefore, it is often used in conjunction with fundamental analysis to form a more comprehensive view of the financial market.
