What Is Technical Analysis?

Technical analysis is a trading tool used to evaluate financial instruments or assets to try to forecast their future movement. This is done by analysing statistics gathered from previous and current trading activity such as price movement and volume. Technical analysis can be viewed as a process of mapping trader and investor psychology. 

Market action is studied mainly using price charts and indicators to project the direction of future price movements of an asset or financial instrument. Technical analysis is derived from the Dow Theory with two main assumptions that:  

• Market price discounts every factor that may influence a security’s price 
• Market price movements are not purely random but move in identifiable patterns and trends that repeat over time. 

When you look at the price of any financial instrument as a technical analyst you believe that is the true value of the instrument as the market sees it. Using a technical approach, you believe that all the factors that affect price, including fundamental, political, and psychological, have all been built into the price you see. That means that anything that can affect the price of a security has already been factored by the market participants. Technical analysts examine the charts for information on the future direction of the markets. 

Technical analysis can be applied to virtually any tradable instrument that is subject to the market forces of supply and demand, including stocks, bonds, futures. indices, commodities, and currency pairs. It can be viewed as simply the study of supply and demand forces as reflected in the market price movements of a security. 

Numerous technical indicators have been developed to attempt to accurately predict future price movements. Some indicators place emphasis primarily on identifying the current market trend, while others identify support areas, resistance areas, market cycles, strength of a trend and the probability of its continuation as well as identifying overbought or oversold market conditions. The commonly used technical indicators include trendlines, oscillators, moving averages and momentum indicators such as the moving average convergence divergence (MACD) indicator. 

Technical analysis can be applied to charts of various timeframes. Short-term traders may use charts ranging from one-minute to hourly or four-hour timeframes, while traders analysing longer-term price movement scrutinize daily, weekly, or monthly charts. Factors such as risk tolerance, trading objectives and the amount of time that one must trade determine what timeframe to do analysis and trade on.