how to use technical analysis
the core principle underlying technical analysis is that the market price reflects all available information that could impact a market as a result there s no need to look at economic fundamental or new developments since they re already priced into a given security technical analysts generally believe that prices move in trends and history tends to repeat itself when it comes to the market s overall psychology the two major types of technical analysis are chart patterns and technical statistical indicators chart patterns are a subjective form of technical analysis where technicians attempt to identify areas of support and resistance on a chart by looking at specific patterns these patterns underpinned by psychological factors are designed to predict where prices are headed following a breakout or breakdown from a specific price point and time for example an ascending triangle chart pattern is a bullish chart pattern that shows a key area of resistance a breakout from this resistance could lead to a significant high volume move higher technical indicators are a statistical form of technical analysis where technicians apply various mathematical formulas to prices and volumes the most common technical indicators are moving averages which smooth price data to help make it easier to spot trends more complex technical indicators include the moving average convergence divergence macd which looks at the interplay between several moving averages many trading systems are based on technical indicators since they can be quantitatively calculated the difference between technical analysis and fundamental analysisfundamental analysis and technical analysis are the two big factions in finance whereas technical analysts believe the best approach is to follow the trend as it forms through market action fundamental analysts believe the market often overlooks value fundamental analysts will ignore chart trends in favor of digging through the balance sheet and the market profile of a company in search of intrinsic value not currently reflected in the price there are many examples of successful investors using fundamental or technical analysis to guide their trading and even those who incorporate elements of both on the whole however technical analysis lends itself to a faster investing pace whereas fundamental analysis generally has a longer decision timeline and holding period by virtue of the time required for the extra due diligence limitations of technical analysistechnical analysis has the same limitation of any strategy based on particular trade triggers the chart can be misinterpreted the formation may be predicated on low volume the periods being used for the moving averages may be too long or too short for the type of trade you are looking to make leaving those aside the technical analysis of stocks and trends has a fascinating limitation unique to itself as more technical analysis strategies tools and techniques become widely adopted these have a material impact on the price action for example are those three black crows forming because the priced in information is justifying a bearish reversal or because traders universally agree that they should be followed by a bearish reversal and bring that about by taking up short positions although this is an interesting question a true technical analyst doesn t actually care as long as the trading model continues to work further readinginvestopedia has several articles and tutorials on the topic of technical analysis follow the links to articles in this journey on the menu bar to the left of this page in addition for further reading you may want to check out the following 