Table of Contents
- Everything You Need To Know About Technical Analysis
- What Does “Technical Analysis” Mean?
- What Is Technical Analysis In The Context Of Trading?
- Does Technical Analysis Predict the Future?
- Why Is It Important?
- What Are The Different Technical Analysis Indicators?
- Which Indicator Should You Use?
- Signal Services and Robots
- Other Tools You Should Be Using While Trading
- Conclusion
Everything You Need To Know About Technical Analysis
If you want to know all that there is to know about Technical Analysis, you have come to the right place! Here we explain what Technical Analysis means, it’s context, it’s applications and the types of indicators available. You may also navigate from here to more in-depth information about each technical indicator specifically.
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What Does “Technical Analysis” Mean?
Now, we are talking here about Technical Analysis in the context of finance, according to the Oxford dictionary, it states:
Financial analysis that uses patterns in market data to identify trends and make predictions.
‘he reads up on company fundamentals and news as a way to double-check his technical analysis’
Well there you have a short answer. However, we are not going to leave it there. There is so much more to tell you!
What Is Technical Analysis – In The Context Of Trading?
Technical analysis is a trading term and is used to identify trading opportunities by analysing statistical patterns gathered from trading activity, such as price movement and volume for example.
When a trader is trading either currency pairs, stocks, commodities or indices, he/she will be observing a chart that shows the prices of the assets in real time. In order to get greater insight into the analysis of the chart, tools may be applied to the chart. These tools are what we call Technical Analysis otherwise known as “Indicators”.
Each indicator bases it’s calculation using a formula applying past data for a particular period. The trader may interpret this data, often in the context of 2 or 3 different indicators.
It is bad practice to base a decision on a single indicator. If 2 or 3 or more indicators are congruent and tell the same story then the trader has a more robust reason for a decision.
Does Technical Analysis Predict the Future?
No. If it did, we would all be rich. You may interpret Technical indicators as a prediction of the future but to describe it more accurately, it would be more fitting to say that it tells a story of the past by bringing to our attention patterns.
Therefore, if a pattern continues then it could become an educated guess about the future. However, remember this, the future hasn’t happened yet.
Significant world events, financial news (otherwise known as Fundamental Analysis), investors activity and even the general mood of the masses can all throw our Technical Analysis out and put a spanner in the works.
Why Is It Important?
Technical Analysis is important not only for predicting the market movement as going up or down but more importantly, TA indicates (if read correctly) when you should enter a trade and when you should exit.
Timing is crucial. Doing the right thing at the right time and NOT doing anything at the wrong time is a huge factor that divides the successful traders from the unsuccessful ones.
What Are The Different Technical Analysis Indicators?
There is no shortage of TA indicators to choose from, that’s for sure! There are plenty and as hard as we try to include a review and explanation of each individual one, we may very well overlook many or have yet to discover them.
There are however “the popular ones”. We would serve you well to cherry pick the most used and best reviewed indicators so as to not overload you with unnecessary information that has not been tried and tested by the masses.
Technical Indicators can be categorised into 4 main types as follows
- Trend indicators
- Momentum indicators
- Volatility indicators
- Volume indicators
Trend
Trend indicators determine the direction and strength of a trend. The indicator will move above or below the average price over a period that you can usually set manually. This would indicate Bullish or Bearish movement.
Momentum
These indicators will compare prices over a period of time to indicate the speed of price movement and volume. Whenever there is a divergence between the price and momentum, there is a possible signal of a future price change.
Volatility
Volatility indicators don’t care about direction. They are reading the rate of price change. This is measured by the highest and lowest price in a period.
This is useful in telling you your range of opportunity in buying and selling. You may also get a clear indication of when best to exit your trade.
Volume
Volume indicators measure the strength of a trend and the direction based on average volume. When volume increases, the trends are usually strong.
We can further break this down into 2 types:
- Leading
- Lagging
Leading Indicators
Leading indicators tell you when a trend is possibly about to start. Examples of Leading indicators would be the Stochastic, Moving Average Convergence/Divergence (MACD) and Relative Strength Index (RSI). They try to lead the price movement by using shorter periods.
Lagging Indicators
Lagging attempts to follow the price action. They give you a signal AFTER the trend or reversal has already started. Therefore, they are useful as confirmation of direction or a change in direction. The most commonly used Lagging indicator would be the Moving Average (MA).
Browse the menu below to read a full in-depth explanation of each Technical indicator we have reviewed to date.
Be sure to subscribe to FX Guys so that you are notified every time we review a new indicator. We add new content to our site twice a week.
Which Indicator Should You Use?
So then, with the abundance of options and information regarding Technical Analysis and Indicators, which ones should you use? We can’t decide this for you, it’s a choice that you must make. However, we can certainly give you a few tips on how you can reach this decision.
- What indicators do the experts like to use?
If you know any professional traders that are making money and doing well, ask them how they set up their charts. How do they get their technical analysis? If they are indeed successful then they are doing something right. If you don’t know anyone, get to know people. There are plenty of online communities. You may find after having spoken to a handful of good traders that they all have similar indicator preferences.
- Don’t learn them all!
It’s better to be the master of one thing than a jack of all trades (no pun intended). In the same way that we advice you should only work with a select few currency pairs to get used to their behaviour, same applies here. Get really good and become a master at a few indicators. It’s better to be an expert reader of 3 or 4 indicators than to have a little bit of knowledge about 20 of them.
- Play around with your Virtual Money
As you begin to experiment with what Technical Indicators you work with best and get you the best results, do so with virtual money. Most brokers give you a virtual account and load it with a virtual $100k or $10k (it varies). This is intended for you to learn to trade, experiment with charts, indicators and strategies. Even if you have been trading with real money for 10 years, there is no shame in testing a new technique in a virtual account.
The Top 5 Most Widely Used Technical Analysis
- Bollinger Bands (BB)
Bollinger Bands are a technical indicator tool that was invented by John Bollinger. There are three lines that overlay your trading chart. A simple moving average (SMA) this would be your middle band and an upper and lower band. The upper and lower bands are two deviations +/- from a 20-day simple moving average, but can be modified in your settings.
More Information on Bollinger Bands
2. Relative Strength Index (RSI)
The Relative Strength Index (RSI), was invented by J. Welles Wilder. The RSI is a momentum oscillator that determines the rate and change of price movements. Typically the RSI tells you that the asset is overbought when it pierces the 70 line and oversold when piercing below the 30 line. The parameters can be manually set by the trader. Signals can be interpreted when divergences occur and failure swings.
More Information on Relative Strength Index (RSI)
3. Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence (MACD) is a trend reading and momentum indicator that shows the interaction between 2 moving averages of an asset. The MACD formula is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. Settings can be tweaked to suit.
More on Moving Average Convergence Divergence (MACD)
4. Moving Averages (MA)
A Moving Average line is used in technical analysis to analyse price histories by averaging prices over your set period that you set it up to read. Simple Moving Averages (SMA) takes the average of a period of prices over the past number of days, for identifying significant, long-term support and resistance levels and overall trends, the 50-day, 100-day, and 200-day Moving Averages are the most widely used.
More Information on Moving Averages (MA)
5. Stochastic Indicator
The Stochastic Indicator is a momentum indicator invented by George C. Lane in the 1950s. It shows the position of the most recent closing price next to the previous high-low price range in comparison. The indicator determines momentum by comparing the closing price with the previous trading range over a certain specific period of time that you set in your settings.
More information on the Stochastic Indicator
Signal Services and Robots
Knowledge is power and there is no substitute for it! If you can and if you are willing, you should learn to trade yourself. Learn everything from, what to trade, when to trade and how to execute your trades. Do not rely on third party services and be at their mercy with your hard earned money. You sit in the driver’s seat. With that being said, there are a few advantages to signal services and robots. Consider these advantages and draw your own conclusion.
- The absence of emotion
Trading can be an emotional roller-coaster because it involves money, it’s not a game. Apart from that, it’s in our human nature to get hunches and act upon our hunches too. Sometimes our hunches pay off and sometimes they don’t. It’s hit and miss.
Should you be entering or exiting a trade? Are you hesitating because you are doubting yourself?
Robots on the other hand are emotionless and are data driven.
- Robots process data faster and better than you
How stressed would you be keeping an eye on a dozen or so assets. You need to shower, eat, sleep and pee. Robots don’t. How fast is your trigger finger? Are you delayed by thinking too much about your decision?
Beware of extraordinary claims from third parties. If they were that good, everyone would be doing it and the markets would crash. Always, test a service or a bot on a virtual account before using real money.
Other Tools You Should Be Using While Trading
While TA is an essential part of trading ought not to be the only thing we have in our tool box. Here are some other things that need your attention.
- Fundamental Analysis
Fundamental Analysis should be used in conjunction with Technical Analysis. While TA deals with passed price data and patters, FA deals with the world financial and economic news which can affect your trading hour by hour and throw TA completely out of the window. So don’t neglect to bookmark your financial and economic news sources and set up notifications.
- Money Management
A good money management strategy will enable you to ultimately profit even while you lose some trades. Nobody ever won every single trade. The best anyone can hope for is a majority win but even the best traders in the world lose trades often. Money management combined with a good trading strategy will see to it that your money grows even if it’s at a slow rate.
- Reliable internet connection
Time and precision is of the essence when it comes to trading. The last thing you need is lagging internet or internet downtime. This can cause your lost opportunities, inaccurate data and loss of revenue.
Conclusion
Technical Analysis allows you to make a prediction of the financial future of the assets you are trading based upon passed past price data and patterns for a particular period. It is not a sure indicator of what will happen, it’s only what will probably happen not taking into account Fundamental Analysis which can throw a whole new spanner into the works.
In addition to indicators that can overlay your chart, you should also understand candlestick analysis and recognise candlestick patterns. Ask yourself, do the past 3 candles indicate to me the same as the Bollinger Bands for example?
If an indicator is telling you that a trend is strong but the candles are saying a reversal is imminent then you have a contradiction and you do well to do nothing.
Support and Resistance lines are another very strong indication of what can happen. Consider Support and Resistance, candlesticks, a couple of your favourite indicators and read the news. If everything collaborates, you should have an impeccable win rate and you’ll have a great life!
FAQ
What Does Technical Analysis Mean?
Financial analysis that uses patterns in market data to identify trends and make predictions.
What Is Technical Analysis – In The Context Of Trading?
Technical analysis is a trading term and is used to identify trading opportunities by analysing statistical patterns gathered from trading activity, such as price movement and volume for example.
Does Technical Analysis Predict the Future?
No. If it did, we would all be rich. You may interpret Technical indicators as a prediction of the future but to describe it more accurately, it would be more fitting to say that it tells a story of the past by bringing to our attention patterns.
Why is Technical Analysis Important?
Technical Analysis is important not only for predicting the market movement as going up or down but more importantly, TA indicates (if read correctly) when you should enter a trade and when you should exit.
What Are The Different Technical Analysis Indicators?
Technical Indicators can be categorised into 4 main types as follows
- Trend indicators
- Momentum indicators
- Volatility indicators
- Volume indicators
What is the difference between technical analysis and fundamental analysis?
Fundamental analysis is a process of evaluating assets by trying to measure a stock’s intrinsic value. Fundamental observers research everything from the general economic and industrial environment to financial conditions and company management.
Technical analysis varies from basic analysis because the price and quantity of the product are the only inputs. Technical analysts are not trying to measure the intrinsic value of a commodity but are instead utilizing price charts to detect patterns and trends that indicate what an asset will do in the future.
What broad types of indicators does technical analysis look at?
- Price trends
- Chart patterns
- Volume and momentum
- indicators
- Oscillators
- Moving averages
- Support and resistance levels
What is the efficient market hypothesis and how is related to technical analysis?
The Efficient Market Hypothesis, or EMH, is an investing hypothesis that share prices represent all knowledge and it is difficult to reliably produce alpha. In principle, neither technological nor fundamental research will yield risk-adjusted excess returns, or alpha, reliably and only inside knowledge can yield outsize risk-adjusted returns. It is the major hurdle of technical analysis.
What is Supertrend in technical analysis?
A ‘ Supertrend ‘ is overlaid on the price chart, and when the indicator falls below the closing price, a buy signal is created as the indicator colour changes to green, Mazhar Mohammad, Chief Strategist-Technical Analysis & Trading Advisory, Chartviewindia.in, told ETMarkets.com.
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