Introduction to technical analysis

Technical analysis, what’s all this business about in the trading industry? You hear about trading platforms with built-in chart features and read blogs about the importance of charting. You may have some basic idea of these charts as tools for predicting the movement of a trading market, but exactly what are these charts and how do you use them? Do you really need to learn how to chart if you want to become a successful trader? This guide will give you the basics so that you can determine whether this is your preferred approach to analyzing the market or not.

technical analysis

Technical analysis vs. fundamental

There are many factors that can predict the rise or fall of a stock on the market. Traders interested in the value of a company are typically fans of fundamental analysis. They look at various factors related directly to the company to determine its stability and strength. The goal is to invest in companies that are predicted to do well in the future, increasing their value and earning the investor money. This can work for commodities as well.

Technical analysis is quite different because it doesn’t consider the strength or popularity of the company at all. The focus is completely on charts which report technical data regarding changes of price on the market. The goal is to predict upcoming trends based on what has occurred in the past. If an investor correctly predicts a future trend, they can make smart investments which earn them money in the short or long term.

The power of history

Are you wondering why some investors with substantial trading experience find it acceptable to forget about the value of a company when making investments? How can they not pay attention to the news, when a company on the stock market is involved in a scandal or a natural resource commodity, is compromised somewhere in the world? More importantly, how do they make big investments without looking at a company’s income statement or cash flow statement?

Big news stories probably do get their attention, but many believe that in-depth study of a company or commodity is unnecessary because the past trends recorded reflect the million little factors that go into determining company or commodity value at any given time. They put their faith in the data, which essentially is faith in history.

In order to rely upon technical analysis, you have to believe, at least to some extent, that trends are established in the market over time. What happened in years past is likely to happen again, and that is how investors can successfully determine future trends just by watching charts which report past data related to volume and price.

Short-term analysis

One thing to remember about technical analysis is that you don’t have to look at the big picture covering a number of months or years. This form of analysis is often completed with short-term data. You can make predictions about trends based on data form a single day or even a portion of a day. It just depends on how much faith you put in your charts and how much risk you want to assume.

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