Technical Analysis is a trading discipline used to assess security and determine trading opportunities by analyzing statistical trends of the trading activity, such as volume and price movement. It is used to assess a security with historical trading data to assess the level of strength or weakness.
Technical Analysis is used to assess a security with historical trading data. A security is a tradable financial asset. This definition encompasses stocks, commodities, currencies, futures, fixed-income, and other financial assets.
The basic idea behind technical analysis is that the past trading activity of a security can determine its future price behavior. The analysis is mostly based on the security’s statistical charts. From this, analysts can deduce the trading opportunities for both long and short positions.
The two basic assumptions of technical analysis are: (1) The market is efficient with factors of values represents that influence the price of a security, but (2) The price behavior in the market is not overall random and moves in recognizable patterns and trends that could reoccur in time.
Using Technical Analysis
Technical Analysis predicts price movements of any tradable instrument such as bonds, stocks, futures, and currency pairs, as long as these are dependent on the forces of supply and demand. In fact, some take technical analysis simply as the study of the forces of supply and demand. Technical analysis also applies to trading volume and open interest figures.
There are hundreds of patterns and signals developed by researchers to support technical analysis trading. They have also developed many types of trading systems that can help predict price movement. Some indicators focus on market trends, while other indicators focus on the strength or weakness of a trend and its probability of continuing.
Generally, technical analysis focuses on the following:
- Price trends
- Volume and momentum indicators
- Chart patterns
- Moving averages
- Support and resistance levels