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The Basics of Technical Analysis

  • Feb 21
    Technical analysis is becoming an increasingly popular approach to
    trading, thanks in part to the advancement in charting packages and
    trading platforms. However, for a novice trader, understanding technical
    analysis – and how it can help predict trends in the market - can be
    daunting and challenging.To get more news about WikiFX, you can visit wikifx official website.

      Technical analysis is the study of price movements in a market,
    whereby traders make use of historic chart patterns and indicators to
    predict future trends in the market. It is a visual representation of
    the past and present performance of a market and allows the trader to
    use this information in the form of price action, indicators and
    patterns to guide and inform future trends before entering a trade.

      Technical analysis involves the interpretation of patterns from
    charts. Traders make use of historic data, based primarily on price and
    volume and use this information to identify trading opportunities based
    on common patterns in the market. Different indicators are applied to
    charts to determine entry and exit points for traders to maximize a
    trades potential at good risk-reward ratios.

      The below chart is an example of a chart with the use of the MACD and
    RSI indicator.  While advocates of fundamental analysis believe that
    economic factors are the main contributors to movements in the markets,
    technical analysis traders maintain that past trends can assist in
    predicting future price movements. Although these trading styles can
    vary, understanding the differences between fundamental and technical
    analysis – and how to combine them - can be extremely beneficial.

      Many traders have found technical analysis to be a useful tool for
    risk-management, which can be a key stumbling block. Once a trader
    understands the concepts and principles of technical analysis, it can be
    applied to any market, making it a flexible analytical tool. Where
    fundamental analysis looks to identify intrinsic value in a market,
    technical analysis looks to identify trends, which conveniently can be
    caused by the underlying fundamentals.

    Charts are key to technical analysis. This is because the most important
    measure of a markets past and current performance is the price itself;
    this is the starting point when delving into analyzing the potential of a
    trade. Price action can be represented on a chart as this is the
    clearest indication of what the price is doing.

      Charts assist in determining the overall trend, whether there's an
    upward or downward trend, either over the long or short term or to
    identify range bound conditions. The most common types of technical
    analysis charts are line charts, bar charts and candlestick charts.

      When using a bar or candlestick chart each period will give the
    technical analyst information on the price from where it opened, the
    high or low of the period as well as the close. Candlestick analysis is
    especially useful as the patterns and relationship within them can
    assist in making forecasts about the future direction of the price.