Monthly Archives: October 2015

What is Technical Analysis?

Technical analysis is the study of past market data, through the use of charts, to predict a security’s future price. Unlike fundamental analysis, technical analysis does not focus on studying a company’s financial statements and earnings to determine a company’s intrinsic value, or its actual worth. Instead, technical analysts use charts and technical indicators to identify patterns that can suggest future price movements. They disregard the underlying data that causes the price movements and focus on what the market is valuing the stock at.

The charts themselves do not cause market action, but rather, they indicate the actions of the marketplace and what has already happened. Charts reflect trades by all market participants, such as buyers, sellers, and even insiders. Analyzing charts means that you are analyzing the behavior of all these traders. Each price on the charts reflects the actions or lack of actions by all the traders in the market.

Technical analysis can be applied to any security with historical trading data. This includes stocks, futures and commodities, fixed-income securities, forex and more. Although we will usually analyze stocks in our examples, keep in mind that these concepts can also be used on other types of securities.

For further clarifications, see how technical analysis is different from fundamental analysis. Continue reading

How To Trade Stocks Using Technical Analysis

Before studying the actual techniques used in technical analysis, we must first understand what it is and how technical analysis is distinguished from fundamental analysis.

What Is Technical Analysis?

Technical analysis is the method of analyzing market action based on historical price and volume activity from charts. Unlike fundamental analysis, it does not focus on the factors affecting the stock price, such as a company’s financial statements and earnings. Instead, technical analysts believe that anything affecting a price, whether fundamentally or psychologically, will already be reflected on charts. Technical analysis is based on the premise that the market discounts everything and that all information – past, current, and even future – is reflected in the security’s price. Therefore, technicians study chart patterns to predict future price movements and identify the best trade entry and exit points. For more details, check out the introduction to technical analysis.

How To Study Technical Analysis

Begin studying technical analysis by learning the different types of technical indicators, including those that measure trend volatility, momentum, and volume. You do not necessarily have to study the math behind the indicator, but it is important to understand the logic as to what the indicator measures and what it can tell you about the market. For example, moving average, one of the most popular and versatile technical indicators, calculates the average price of a security over a period of time. Starting with well-known indicators such as moving average, relative strength index, and stochastic oscillators can help you learn how these valuable tools are used to help investors make trading decisions.

There are a growing number of resources, such as technical analysis books, available in print and online formats that you can take advantage of. The stock market is a serious matter and it is important to do your homework before you start trading with your own money. You do not need an economics degree or have a CFA license to analyze a stock chart, but to become a successful trader, you need to study hard, be dedicated, and have an open mind.

Trading Using Technical Analysis

Once you have an understanding of the various types of technical indicators and what they measure, you can apply them to price charts. Test out different indicators and find the ones that work best for you. Keep in mind that technical indicators do not provide universally correct trading signals. The indicators that work and make sense to you might not be the same for the next person. In fact, many traders will look at the exact same chart and derive different answers. Rather, technical analysis is partly an art, where it is up to each user to interpret the information.

Practice trading by using the technical indicators in a live market before you start trading with your own money. Pick a handful of securities to monitor in real time and use technical indicators to predict the next action. Repeat this process until you have found the indicators that work for you. You can practice trading using virtual money with this free stock market simulator.

The study of technical analysis is a continuing learning process and it is okay if it takes several weeks or months to get comfortable with the indicators. Once you are ready to start trading, do some research on the different types of brokerages and choose a brokerage that suits your trading requirements.

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