Most investors evaluate stocks based on their fundamentals–such as sales, value, or developments in industry–but the market price does not always represent fundamental factors.
Through using methods such as statistical analysis and behavioural economics, technical analysis helps traders and investors negotiate the difference between intrinsic value and market price.
In order to make decisions, most investors use both technical and fundamental analysis.
What is Technical Analysis?
Technical analysis (TA) is the use of past market data for inventory analysis and better trading decisions.
It is based on the idea that the price of a product will be calculated more reliably by supply and demand than the intrinsic or “real” value of the company.
Technical analysts look over time at price movement, trading volume, and other historical data on the market.
They then find trends and patterns that can be used to predict future movements in prices.
At first it may seem difficult, but in fact, most traders find it easier than their fundamental analysis counterpart.
It is less personal, requires less work, and can be used even if you don’t know much about the industry or sector.
How does this type of analysis work?
The principles behind technical analysis were based on Charles Dow’s work. The Dow Theory was developed by Dow, which suggests market history tends to follow trends and repeat itself.
Investors will be able to profit from the trends by taking a closer look at stock market patterns— even if the business itself is not inherently profitable.
Support And Resistance Levels
Trend lines and levels of support and opposition may be somewhat confusing.
Because pattern lines can be called either support or resistance areas for the purposes of this article, “Support and Opposition Levels” will apply only to “pivot” horizontal price areas.
A level of support is confirmed by the fact that a considerable number of traders are willing to buy the coin, or demand, at a certain price.
Some traders assume the coin is either at a loss or a fair price at this rate and are willing to make the purchase on the basis of the expectation that the price will go up again.
The reverse is a degree of resistance.
Exactly the opposite is a level of resistance — an area in which many sellers believe the value can not go above.
Therefore, whenever the coin hits the “ceiling,” it meets the supply and the price drops.
A breakout happens when the price reaches a previous level of support or resistance and then either “breaks out” by overcoming or dropping through that support.
Breakouts are usually followed by an increase in volume as bulls become bears and vice versa as their “protected zone” is overcome and they are forced to consider the risk of being on the wrong side of the trade.
A false breakout happens when the breakout is abrupt but there is no shift in the trend and the price rapidly retreats to the mean and re-enters the original channel between support and resistance.
Reading Chart Patterns
Candlestick charts are great to interpret near-term price action, but the bigger picture may need to be looked at by traders looking for longer-term swing trades.
Price patterns can provide additional insights into long-term price trends and areas of support or resistance for multiple days, weeks, or months.
For example, Figure 2 shows an upward pattern of triangle that led to a breakout.
An integral part of predicting price movements is to examine candlestick and volume trends over short periods.
You should not, however, rely solely on these two indicators.
Consider considering price movements over longer periods of time (such as days, weeks, and months).
This will ensure you are not tricked into buying or selling at the wrong time by the market.
Volume is another metric that you’ll see when you look at price graphs.
There are two types of volume to consider: the literal sales volume (the number of coins traded during the period you observe) and the volume of the dollar.
Generally the actual volume appears along the bottom of a price chart as a line.
The column height reflects the volume’s graphical marker, and the color shows whether the volume was more bullish or bearish.
Volume is vital because it is an indicator of the seriousness of a bearish or bullish market.
Large trading volumes are highly volatile prices.
As a trader, volatility is important because it allows you to purchase at a low price and sell at a high price.
How is technical analysis used?
For both short and long-term trading, technical analysis is used.
A long-term trend investor could use technical indicators to decide when to buy shares for their portfolio, while they could be used by a short-term day trader to identify quick profit opportunities.
Timing is a crucial part of successful trading, and technical analysis can help you time your trades to maximise profits and minimise losses.
Technical analysis can be used on almost any market – all you need is a price chart and access to some technical indicators.
So, whether you want to trade stocks, indices, forex or cryptocurrencies, technical analysis can be of use.
Technical analysis provides a great way for investors to analyze critically where the value of a commodity can be changed in the future based on its past performance.
Although these observations are never 100% accurate, they can help to determine when and at what cost a trade can be made to maximize risk-adjusted returns.
A full technical trade, for example, may entail a trader looking at the price chart of a security and seeing a lasting uptrend over several timeframes.
The trader can consider an ascending triangle pattern showing a key breakout point supported by technical indicators after further study.
After a bullish engulfment occurs in the candlestick chart, the final purchase decision can come.