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Technical Analysis Basics

Technical Analysis

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Technical analysis is the practice of using past pricing information on charts to predict future pricing trends. A chartist attempts to predict the future from an evidence-based viewpoint, taking positions based on signals suggesting a trend will continue or reverse in the future. This is more of an art form than a science performed in hopes of deriving the marketplace’s viewpoint towards the asset’s underlying fundamentals. Note that sentence says the viewpoint of the fundamentals, and not the fundamentals themselves. Technical analysis can also be viewed as an attempt to interpret market psychology.

Technical analysis focuses on the price of a security. The marketplace attempts to include all known information in price by rapidly purchasing assets who have recently released information believed to have a positive impact on fundamentals. They sell assets which have recently released information deemed negative to their fundamentals. Since accurately acting first on new information that affects price gives a trader additional profit, the race for those returns on a trade rapidly adjusts prices towards new estimations of value based on that data. These estimations of price value may be incorrect and are often corrected at later dates by fundamental reports released by companies or analytical organizations in the market.

While fundamentals and valuations can estimate the approximate value of an asset or security, the price of the asset in any market is based on how the marketplace’s participants value the asset in aggregate, and not valuations themselves. This allows the price to deviate from fundamentally derived values, often in a trending direction. Technical analysts attempt to forecast the trend direction of an asset, and where the price will be over a period of time.

Trends

Trends move upwards or downwards and continue until they are consolidated or reversed. A consolidation results in price trading sideways within a narrow price range. Trading for profit in sideways range becomes difficult. The alternative is a reversal, in which the trend turns in an opposite direction than it was previously traveling. Chartists assume the trend is in effect until the majority of the available evidence says the trend has reversed or consolidated. The evidence almost never completely agrees, which is why we say “majority”. The existing trend is favored if evidence is in question, and technical analysis often refers to fundamental analysis for clarification of confusion. But you should remember that this is always a hypothesis since it is based on individuals who change their minds often acting in mass.

Your goal is to take advantage of the crowd’s behavior, positioning yourself to gain from exploiting the trend. A trader uses technical analysis to identify likely crowd behavior, profitably entering and exiting positions accordingly.

Profit is actually earned by selling a bought security for more than its purchase price, or buying a short sold security for less than its sale price. Sales higher than purchase price occur best in uptrends, and purchases for less than a short sales price occur best in downtrends. If the price is trending against a position you are considering, that position should be avoided until the price trend reverses. There is one absolutely essential rule of technical analysis: You do not, ever, trade against the trend.

Economic, Sentiment, Fundamental, Technical

A careful note should be stated here: The point of technical analysis is not discovering or generating ideas for trades you haven’t previously investigated at an economic or fundamental level. Technical analysis should not be seen as a source for trades, but a filter for trades. It is used to eliminate bad trade ideas, time entries to ideas that pass its filter, and time exits to trades that are successful or failing.

Technical Analysis and Time

It is important to note that time frame in Technical analysis does not matter. Since technical analysis is technically measuring human psychology in relation to price, patterns displayed in the market are repetitive. The practice of technical analysis remains constant irrelevant of the time frame, but effects are magnified for longer terms. Trends in price and volume identified over the long term typically supersede (or even dictate) short term trends. It is highly recommended that technical analysts begin by identifying long-term trends, support, and resistance levels. They can execute mid-term technical analysis afterward, before finishing with short term and intraday analysis.

Technical Analysis and Multiple Markets

Lastly, Technical analysis can be used in any market which shows pricing charts. You can easily move from one market to another instead of being restricted to a specific area. A person trading equities using technical analysis can easily shift to futures markets. This allows them to trade sugar, wheat, copper, gold, silver, and even more commodity and interest markets. As long as the market is charted over a period of time, a skilled technical analyst should be able to read situations via the charts.

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  • Large Funds Currency Sentiment Readings
  • List of Technical Indicators to Look For
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American Markets Analysis:

  • Summaries of American Economic Structure
  • Performance of Major
  • Imports/Exports
  • Federal Reserve Mandate versus Expectations
  • Performance Indexes of U.S Economy
  • Economically Correlated U.S Dollar Projections
  • Large Trading Fund Index Sentiment Readings
  • Market Wide Earnings Versus Valuations
  • Fundamental Ranking of U.S Business Sectors
  • Best and Worst Future Consensus Estimates
  • Occasional: Firm Fundamental Strength Report
  • List of Technicals to Look for While Trading

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