The Basics of Technical Analysis is the first of a series of articles on how to trade successfully using technical analysis. In Part I we covered basic terminology, definitions and concepts. In this article we will take a closer look at the basics of technical analysis itself, as well as how it can be applied to various market situations. This should give you a better understanding of this important investing technique.
Technical analysis is basically a method used to analyze and predict the future price movements of securities by studying things such as patterns, price movements, trends, patterns and many other factors. Unlike fundamental analysis, technical analysis relies on much less reliable data to predict future market activity. This makes it more difficult to anticipate changes in the market which may affect an investment strategy. However, even with this somewhat uncertain methodology, it is a popular way for traders to make a living and protect their finances.
The Basics of Technical Analysis deals primarily with how certain types of securities are evaluated for patterns in their behavior. These patterns are used as indicators to tell traders which securities should be bought and sold, according to their potential return on investment. There are a number of different types of technical analysis that are used in the stock market. Some of the most popular include charting, relative strength ranking, moving averages and Fibonacci levels.
In order to analyze stocks using technical analysis you must learn about patterns in the real world. It is not enough to look at the numbers on your computer screen. You must also understand how the numbers fit into the overall financial picture you are trying to portray. For instance, if you look at the history of the S & P 500 and the current stock price, you can start to develop an understanding of what these numbers are telling you about the health of the company. However, you cannot rely solely on this information alone. You must also examine the historical trading data that reveals what stocks are performing well and which ones are experiencing poor performance.
The Basics of Technical Analysis considers two main methods of predicting future trends in the stock market. They are known as fundamental analysis and technical analysis. Fundamental analysis uses current, real-time information about the health of a company to make educated guesses about what its future stock prices will be. Technical analysis looks at historical information about past stock prices and makes educated guesses about how those prices will react to prevailing conditions. By combining the two you can get a good idea of the overall health of a company and, as a result, its potential for the future.
One of the primary advantages of technical analysis is that it gives traders the ability to determine whether current prices are based on fundamental factors or whether they are being influenced by short-term factors. By having this information before the investment begins they can make better decisions about whether to purchase or sell. A good technical analysis chart will help traders make use of different indicators to determine when to buy or sell and how to interpret their results.
Traders who practice technical analysis need to keep in mind that there are two types of charts used. One type of chart, called a trend line, shows the general direction and distance from the current price action. This type of chart is considered to be one of the most effective for beginners because it is easy to understand and follow. The other type of chart, called a price action chart, is designed to show the price action over a longer time frame. Price action charts are used for more sophisticated traders who attempt to use indicators to give them a better understanding of the markets.
Although technical analysis covers a wide variety of topics, it can be simplified into two major categories. The first category of technical analysis is what is known as fundamental analysis. Fundamental analysis focuses on the economic and price factors of a security or market and its effect on intrinsic value based on the time frame. Technical analysis on the other hand is concerned with the patterns in price action and is based on the number of patterns found in trends. Both of these methods have advantages and disadvantages and are used in varying degrees by many traders.