What is Technical Analysis?

Overview

History repeats itself!

This type of approach of trading is classified as Technical Analysis where an analyst uses historical stock statistics such as price and volume. Statistics help analysts forecast future prices. A technical analyst finds a pattern in the stock’s data, assumes that the pattern will repeat itself in the near future and places trades in the way that the pattern directs her/him.

Technical analysts use technical indicators such as Moving Averages, MACD, Regressions, Support/Resistance levels, etc. to help in making trading decisions. Technical analysts look for trends in the market.

Basic Assumptions

The basic assumptions of a trader who follows the Technical Analysis approach to trading are:

  • Stock price has all the information.
  • Stock is either trending up, down or sideways.
  • Prices move in patterns.
  • Price action repeats itself.

Technical analysts rely heavily on charts to make their decisions.

E.g: Suppose a trader notices (usually with the help of a graph or chart) that the previous 25 times, every time stock XYZ trended up 1%, it was followed by a downward tend. In this scenario, the trader has stumbled upon “zig-zag” price pattern—the market seems to start selling stock XYZ every time it trends up 1%. Now, whenever the price trends up 1%, this particular trader will look to sell the stock because she/he has picked up on that signal from market trends.

Traders look for such types of patterns to help make their trading decisions.

One can get started with Technical Analysis by researching the popular technical indicators mentioned earlier. Ensure that your stock broker offers charting tools as a part of your trading software. Ask your broker what technical indicators are available and how to go about implementing them.

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