What Is Technical Analysis?

Technical analysis forms a crucial part of the trading puzzle. For the large hedge funds and institutional investors, they devote millions on employing staff for market analysis and technical interpretation, such is the importance of the technique in establishing price outcomes. Essentially, markets are pinned down by highs and lows, with prices fluctuating in cycles over time. It is the job of technical analysis to make it easier to identify those cycles, and to help traders find patterns that could be thought to indicate futures price movements.

To the untrained eye, technical analysis charts and data can look like a mind-boggling maze of graphs, lines and odd-shaped diagrams. Fortunately, for the trader these represent an invaluable tool, and once you’ve had the chance to understand how technical analysis data is presented and what it means, you will find it much more straightforward to work within the confines of these analysis styles.

Technical analysis tools are often handled through your broker, who will almost certainly have some kind of unique charting and analysis application within their offering. It’s usually part of the deal, and brokers use it as a sweetener to encourage people to sign-up for an account with them rather than the competition, so often these applications tend to be of a high quality. There are also external applications (mostly paid-for) that can be used if preferred.

The main objective with technical analysis as a pursuit is to present numerical data in a visual way, with a view to seeking patterns, correlations and other relationships between price points. A trader will normally look to see how the current market is trading first of all, in relation to the previous highs and lows over a period similar to that of the intended investment.

This is part of the process of getting to know a market, and for futures trading where leverage plays an increased role in risk exposure, that’s never more important. It would tend to be the case that patterns would be sought amidst line graphs, which show the trajectory of price movements between two given points and very clearly provide a visual illustration of notable landmark prices.

It is also commonplace for traders to use so-called candlestick graphs. These look unfamiliar to those outwith the trading sphere, but they are actually a very simple to understand representation of a great deal of vital information. The horizontals represent opening and closing prices, while the tails showing the highs and lows over the given trading period. Finally, the candlesticks will be coloured in contrast, with one representing a rise in value on the close and another representing a decline. Thus, candlestick charts represent a clear and definite indicator of how prices have behaved on a given day or period, allowing futures traders a better insight into how they might behave in future.

While past price performance can never be indicative of the future, it generally follows that more often than not prices respond in similar ways over time. Markets instinctively know their limits, and it tends to take a lot to push them beyond those boundaries for too long. By getting to grips with the intricacies of graphical technical analysis, you will find it more straightforward to interpret price behaviours, leading to more accurate predictions and, ideally, more consistent trading.

Be Sociable, Share!