The Basics Of Technical Analysis

Many traders have found technical analysis to be a useful tool for risk management, which can be a key stumbling block. Once a trader understands the concepts and principles of technical analysis, it can be applied to any market, making it a flexible analytical tool. Where fundamental analysis looks to identify intrinsic value in a market, technical analysis looks to identify trends, which conveniently can be caused by the underlying fundamentals.

Benefits of using technical analysis include the following:

  • Can be applied to any market using any timeframe
  • Technical analysis can be used as a standalone method
  • Allows traders to identify trends in the market

USING CHARTS IN TECHNICAL ANALYSIS

The below chart is an example of a candlestick chart for the EUR/USD currency pair.

EUR/USD candlestick chart

Charts are key to technical analysis. This is because the most important measure of a market’s past and current performance is the price itself; this is the starting point when delving into analyzing the potential of a trade. Price action can be represented on a chart as this is the clearest indication of what the price is doing.

Charts assist in determining the overall trend, whether there's an upward or downward trend, either over the long or short term or to identify range-bound conditions. The most common types of technical analysis charts are line charts, bar charts, and candlestick charts.

When using a bar or candlestick chart each period will give the technical analyst information on the price from where it opened, the high or low of the period as well as the close. Candlestick analysis is especially useful as the patterns and relationship within them can assist in making forecasts about the future direction of the price.

Once a trader has mastered the basics of charting, they can then make use of indicators to assist in determining the trend.

TECHNICAL ANALYSIS INDICATORS

Indicators are used by technical traders when looking for opportunities in the market. Although many indicators exist, traders often make use of volume and priced-based indicators. These assist in determining where the levels of support and resistance are, how often they are maintained or breached as well ascertaining the length of a trend.

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