What is Technical Analysis: An Introduction

Technical Analysis

Analyzing securities and making investment decisions is complex and there are several methodologies to do so. Among the primary methods, technical analysis is the most used method in case of forecasting the price movements of market-based on already reflected past data.

What exactly is Technical Analysis?

Technical Analysis is a technique to forecast the direction of price movements through the use of actual price behaviour of instrument or market based on the price reflected in past in all the relevant publicly available information.

Unlike the fundamental analysis, technical analysis does not determine accurate future of the market. Technical Analysts predict how the market “might become”. Various types of charts are used for technical analysis.

Technical Analysis is used for various financial elements like stocks, commodities, indices etc. Basically, it is applicable where the price and market is influenced by ‘supply and demand’. It works based on price range like ‘high’, ‘low’, ‘open’ or ‘close’ and that within a provided time frame which can be like intraday, daily, weekly as well as monthly data.

Why it is beneficial to use technical analysis?

Technical Analysis gains the majority of upvote in comparison to the fundamental analysis and it is quite a debate. But in general technical analysis is beneficial for short term trading like day to day to intraday trading. Main benefits of technical analysis are:

  • Technical Analysis works with current price and current price holds all the current information about any asset. So, investors use all the past information of “current prices” during different point of time and create charts. Thus the future trend of the price can be foresaid easily rather than thinking on the cause of market price variations. This makes trading easier and simpler.
  • Traders use the trends in which the price moves. Though there are wild and random variances in price moves happen, but it is not regular. Generally, prices follow a biased directional trend to move and it is profitable for the traders to follow the trend and capitalize from the moves.
  • Using charts in technical analysis has benefits as the analysis of past charts can give traders a price moving pattern in history and it can be very useful predicting future moves successfully.
  • Technical Analysis gives traders the insights of price moves, information and data within any given time frame required easily. This makes technical analysis very useful for predicting patterns of price moves in a certain period of time.

Indicators in Technical Analysis

Technical analysis is all about using and analyzing past market data. So, as opposed to any subjective method, technical analysis uses the ‘Indicators’ more than any other subjective methodologies. Indicators are statistical calculations which use trends, money flow, momentum and volatility. This helps the traders to create their buy or sell patterns and measure actual price movements.

There are two types of indicators which are primarily used –

  • Leading Indicators
  • Lagging Indicators

On the base of how they are built, indicators can be divided into another two types –

  • Oscillators
  • Non-bounded Indicators

Following are three must-know indicators that technical analysts use majorly and also can be used on Omnesys/Thomson NEST Trader:

  • The Moving Average Convergence/Divergence(MACD) Indicators
  • Simple Moving Averages
  • Relative Strength Index(RSI)

Disadvantages of using Technical Analysis

  • Using different indicators can result in different buy or sell signals on same asset. This is a major disadvantage of using technical analysis in trading.
  • Accuracy of the forecasts is not guaranteed as the analysis follows the trend always.
  • Opinions are biased as different traders use different techniques.

Still, have some queries about technical analysis? Drop your questions and we’ll try to revert to your comments in the least time.

Submit a Comment

Your email address will not be published. Required fields are marked *