Introduction To Technical Analysis

Part 8 Introduction to Technical Analysis
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Technical analysis is a method for analysing an asset or market for the purpose of making a trade.

As opposed to fundamental analysis that looks to determine the intrinsic value of an asset, technical analysis is mainly concerned with the analysis of the price movement of an asset over time and the resulting chart patterns and key levels.

What Are the Uses Of Technical Analysis?

Technical analysis has four key uses:

  • Identifying trading opportunities and timeframe
  • Timing entries and exits
  • Position sizing
  • Managing Risk: through identification of key price levels and changes in volatility.

Ultimately, these are all the key elements of trading and can be summarised as: finding good opportunities for trading in a suitable time frame, entering with optimal timing and sizing whilst managing the risk inherent in that trade.

What Are Technical Analysis Patterns?

Many people may look at technical analysis as inferior to fundamental analysis, after all what significance can you really read from patterns on a chart?

Well, the answer to that is twofold, first we can say that it is not inferior to fundamental analysis but serves a different purpose which we will explain in depth in the coming units.

Secondly, and very important to remember is that no analysis whether fundamental or technical is perfect. The biggest trap that new traders fall into is that they look for magic patterns that guarantee an outcome.

This will never be the case. In reality technical analysis is a story about the price action. If you want to use it successfully you need to learn how to read that story and then evaluate it against what you are actually seeing in the price action.

Technical Analysis is a story about the price action.

For example – a reversal candle pattern is a type of pattern that people use to look for a change (a reverse) in the prevailing trend. So, if you see a bullish reversal pattern, it may suggest that the down-trend could reverse and start moving up.

Well that may be true but the question is, did that pattern form in a place in the trend that made sense? If it formed in an already existing up-trend then it basically adds nothing to the story of the price action.

On our website you will find all the major candle patterns explained and with each one we remind you that it needs to be seen in the right context.

If you are interested in reading more about candlestick patterns you can find our articles on this topic here: https://www.nothardtrading.com/category/candle-patterns/ or choose a pattern below to read more. 

Where Did Technical Analysis Come From?

Technical analysis is something that has developed over time. Just like the weather is predicted based on weather cycles that continually repeat, technical analysis looks at past patterns in price action and tries to predict the future based on the probability of that pattern repeating.

And, just like the weather, it is not always accurate. Trading is a probability game, as traders we are looking to develop strategies that limit our risk and achieve a profit. There are no guarantees.

Due to the popularity of technical analysis there is an element of self fulfilling prophecy with the most popular technical levels and signals. When everyone expects a move, they vote with their money by trading it, which creates the move itself and reinforces the idea.

Trading is a probability game, as traders we are looking to develop strategies that limit our risk and achieve a profit. There are no guarantees.

However, these patterns were not just made up, they have come from observation of a lot of price movement over time. This price action came from people trading the market so you could say that the charts not only represent everything that the market knows about an asset, but also the full range of human psychology – fear, greed, caution, optimism.

What Are The Elements Of Technical Analysis?

Technical analysis is not just about patterns, there are also fundamentals to learn such as trends, support and resistance and a whole range of additional technical indicators and tools that can be used.

As this is a fairly large topic – even as just a basic overview, I have divided this topic into 5 units that will cover the main elements of technical analysis.

For most of these units there will also be downloadable pdfs so watch out for those. To continue, click the next link:

Read More: Technical Analysis Basics

This mini-blog is part 0 of our Introduction to Technical Analysis unit which forms part of our Trading Basics Series. This mini-blog consists of the following:

More Trading Basics

There is loads more to learn and we will uncover more terms in the rest of the Trading Basics blog series. Read our previous or next unit.

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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