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Technical Analysis

Technical Analysis is the study of prices and volume, for forecasting of financial price movements. Technical analysis does not result in absolute predictions about the future.  Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time. 

Technical analysis is not an exact science. It's an art and takes considerable experience. Not all studies work the same for every instrument traded. One study may give excellent buy and sell signals while another may not work for you at all.

Technical Analysis Basic Principles

Technical Analysis is based on these three basic principles:

- Price Discounts Everything
- Prices move in trends
- History repeats itself

#1 - Price Discounts Everything

Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders, and …

Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.

#2 - Prices Move in Trends

Technical analysts or chartists believe that profits can be made by following the trends. In other words if the price has risen, they expect it to continue rising; if the price has fallen, they expect it to continue falling. However, most technicians also acknowledge that there are periods when prices do not trend.

#3- History Repeats Itself

Technical analysts believe that investors en masse repeat their behavior and they assume that there is useful information hidden within price histories; that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transactions.

Technical Analysis Tools

Every technical analyst needs charts and indicators to study market. Three common types of charts are used by investors: Line Chart, Bar Chart and Candlestick Chart.

Line Chart is formed by plotting one price point, usually the close, of a security over a period of time. Connecting the dots, or price points, over a period of time, creates the line.

Bar Chart is drawn by high, low and closing price. Sometimes, bar charts are drawn by opening price. In this case, bearish bars are drawn with another color.

Candlestick Chart A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day's price range. A wider body marks the area between the open and the close.