An introduction to Technical Analysis

Fundamental and Technical Analysis are the two disciplines widely used to decipher the financial markets. While Fundamental Analysis is just as critical, considering it is a company's financial health check, Technical Analysis focuses more on behaviour and future prices.

So, what is technical analysis?

In short, technical analysis studies statistical data gathered from market participants' behaviour (supply & demand) and psychology (sentiment). These trading activity data are used to estimate the probabilities of future prices in the financial market or even an investment portfolio.

Technical Analysis Terms

Price action

The movement in a security's price is plotted over a certain period and can be seen and interpreted using charts. Price action is not a trading tool like a technical indicator but rather the data source from which all the tools are defined.

Volume

Price action and volume form the basis for all technical analyses of securities. Volume is an essential indicator in technical analysis because it is used as a measure of the relative significance of a market move.

Trends

A price trend is the overall direction of a market or an asset's price, and always remember, the trend is your friend.

In technical analysis, trends are identified using trendlines to determine the direction. Three main price trends represent a market cycle that technical analysts look at, namely: an uptrend (Bullish), a downtrend (Bearish), and a sideways trend (consolidation phase).

Trends are also identified when the price action makes higher highs (HH) and higher lows (HL) for an uptrend or lower lows (LL) and lower highs (LH) for a downtrend.

Support and Resistance

These two main concepts in technical analysis are essential in analysing price charts.

Support occurs when a downtrend pauses due to a concentration of demand.

Resistance occurs when an uptrend pauses temporarily due to a concentration of supply.

Market psychology plays a significant role as traders and investors remember the past and react to changing conditions to anticipate future market movements.

Price patterns

Price patterns or chart patterns are the visual representation of investors/trader's behaviour in the financial markets and are the foundation of technical analysis.

A price/ chart pattern can be seen by connecting price points during a specific period.

Technical analysts try to identify price patterns to preempt the direction of an asset's price or even a whole market. These price patterns can be as simple as trendlines and as complex as double head-and-shoulders formations.