What Is Technical Analysis?
Technical analysis is the process of predicting the price movement of tradable instruments using historical trading charts and market data. As a result, investors can spot potential short- and long-term investment opportunities. Commonly used in behavioral finance and quantitative research, it helps analysts examine trends in securities trading.
Technical analysis allows traders to evaluate the impact of a security’s supply and demand on its price, volume, and volatility. Trading signals and price patterns obtained through this metric accurately reflect current stock, forex, and commodities markets conditions. On the other hand, the fundamental analysis only evaluates the company’s financials (sales and earnings).
Investors analyze price movements to get an idea of the market direction and represent them on a graph in various forms. Then, traders examine trades based on them and decide whether to invest or wait for a better trading opportunity.
As an investor, one might find the price movements being represented in the following forms:
Technical analysis is the analysis of the price movements in a market or of an instrument over a period of time, which could range from short term to long term, to reveal investor trends.
Investor sentiments and behaviour dictate prices which are set at the meeting point of demand and supply at any given point in time.
To conduct technical analysis, one does not need to know the instrument or the market in depth but needs the data of a freely-traded instrument or market because price movements betray investor behaviour and can reveal the best time to buy or sell for investors. Analysts focus on the following indicators while doing technical analysis:
· Price trends
· Oscillators
· Moving averages
· Chart patterns
· Momentum and volume indicators
· Resistance and support levels
The impact of supply and demand on changes in price, volume, and implied volatility is examined using technical analysis tools. It operates under the presumption that, when combined with suitable investing or trading rules, historical trading activity and price changes of security can serve as valuable predictors of the security’s future price movements.
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