What is technical analysis?
So, you understand how trading works, but are still wondering how to know what to trade and when. Well, traders often inform their decisions by conducting market analysis, which involves utilizing the information available at present, to make an educated prediction about future price movements. There are two main types of market analysis; technical, which we will cover here, and fundamental, more on that later.
The importance of historical data
History tends to repeat itself, a common saying that forms the foundation for technical analysis, which involves the study of historical price movements to identify patterns and determine the likelihood of them repeating in the future.
So, how exactly do technical analysts study historical price data? Well, by looking at the charts. The most basic concept in technical analysis is price trends. Technical analysts look for recurring patterns in charts that suggest the future course of prices. Some patterns can appear at the end of trends, while others may indicate that a trend is likely to continue.
It is worth noting, however, that there is no guarantee that past price action can accurately predict future movements, so, technical analysis should never be used as the sole basis for a trade.
It’s all in the charts
Technical analysts are also referred to as chartists, based on their belief that all the important market information is reflected in an asset’s price. Basically, a chartist focuses solely on price action in their analysis, as they feel all fundamental information has already been priced into the current market price.
Although technical analysis can be a useful tool, it’s important to understand that it is also subjective. Two traders looking at the same chart and using the same technical indicators can often come up with different ideas as to where the price of an asset will move next.
You should be aware of the tools available to help you in your trading, but not become over-reliant on them. It is always best to use as many data points as possible to inform your decisions when entering the market.