Technical analysis is the idea that traders can look at historical price movements and us this data to work out current market conditions and potentially predict future price movements. Many proponents of technical analysis claim that all current market information is reflected in the current price and historical prices. If all market information is contained within current and historical price action, then traders would have all the information they need readily available to them.

Technical traders put a lot of weight in price history, holding that history tends to repeat itself. Technical traders often use historical prices to help determine where support and resistance levels might be, using these price levels as the basis for entering and exiting positions.

Technical analysts don’t only look out for support and resistance levels. Many technical traders also keep an eye out for particular patterns, believing that certain patterns will repeat themselves. For instance proponents of Elliot Waves look out for certain price patterns, creator R.N Elliot believed that human action was governed by certain natural laws which were bound to repeat themselves.

elliot_wave_theory

Technical analysis is strongly associated with charting; this is due to the fact that charts are probably the best way to visualise historical price action. It is easy to use charts and indicators to identify potential trading opportunities.

Lots of traders use technical analysis very effectively and it has been suggested that technical analysis is somewhat of a self-fulfilling prophecy. With the huge number of traders looking for the same price patterns and technical signals, the collective power of these traders are thought to have the power to move the markets.

This idea isn’t without its detractors and the fact traders use a huge range of different technical strategies makes this idea seem rather dubious. Technical analysis being a very subjective subject matter and many traders disagree about how different indicators should be used. It is perfectly possible to draw different signals from the same technical setup.

Many traders use technical analysis very effectively and those interested in adopting a technical approach to trading will be able to find a number of resources introducing various concepts in technical trading. We here at The Fx View, have produced a number of introductions to technical analysis which you may find useful. I also recommend Baby-pips, who feature a full introduction to Forex trading and Stock Chart’s Chart School which provides some very good introductions to various popular technical indicators.

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One thought on “What is Technical Analysis?

  1. I guess I don’t truly fall into either category, although I favor technical analysis. In the stock market, I combine technical and fundamental analysis. In the Forex market, I mainly rely on technical analysis.

    I also believe technical analysis does, at certain times, become a self-fulfilling prophecy. Just attach a 20 and 50 ema to a chart, and count how many times it acts as dynamic support during an uptrend or dynamic resistance during a downtrend.

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