Technical Analysis

In financial trading, technical analysis refers to the method of studying the previous history and price movements of an instrument, such as foreign exchange, stocks, commodities, etc.

Key determinants include an asset’s historical price action, chart patterns, volume, and other mathematical based visual tools, in order to predict future movements of that instrument.

Traders who utilize various means of technical analysis are known by a variety of terms, such as technical traders, technical analysts, or technicians.

The crux behind technical analysis is the notion that past performance of a financial asset is a potential evidence for future activity.

Unlike fundamental analysis, technical analysis does not bother with the causes of price fluctuations; it only deals with its effects.

Therefore, technical traders diligently observe historical charts of the instrument they’re interested in trading.

By applying a number of techniques, technical analysis ultimately helps forecast how prices will act, sometimes in relation to time as well.

There are a multitude of visual tools available for the technical trader, with the most popular of them included in all of the major broker platforms today.

Understanding Technical Analysis

Technical analysis itself consists of a number of different methods, which generally fall into two main categories – leading indicators or lagging indicators.

Leading indicators refer to those charting tools which enable the trader to predict the movement of an asset before it actually occurs.

Such leading techniques include Fibonacci, pivot points, trend lines, divergence and harmonic trading, and are popular with traders who prefer to trade reversals.

Lagging indicators are those visual tools which enable a trader to take advantage of a strong trend, entering upon it whilst in formation; such tools include the MACD, the Awesome Oscillator, and moving averages.

Technical traders don’t all use the same tools of course, and even a trader that uses a particular indicator.

For example, the Stochastic Oscillator will probably use it in a different manner to another trader using the same indicator or set of indicators, making technical analysis extremely subjective.

Having said that, there is merit to technical trading, and as unintuitive as it may seem, previous price patterns do appear time and time again.

As an increasing number of traders seek specific market points, the probability of those points holding significance also increases.