What is Technical Analysis?
Overview of Technical Analysis
Technical analysis is a trading discipline used to evaluate investments and assess investing opportunities by analyzing chart and pattern trends from trading activity, such as price movement and volume. Technical analysts believe past trading activity can be a valuable indicator of a stock's future price direction. Technical analysis can be used along with fundamental analysis (a ccompany’s financial numbers such as sales and earnings) in making well informed investing decisions.
Technical Analysis Details
Technical analysis was first introduced by Charles Dow in the late 1800s. Today, technical analysis has evolved to included a wide variety of patterns and signals. Technical analysis centers on the analysis of pricing and volume. Technical indicators are used to analyze the ways supply and demand for a stock will affect changes in price, volume and volatility. Technical analysis is used to develop trading signals from a variety of charting indicators and can also help improve the evaluation of a stock’s strength or weakness in relation to the market, a particular sector, or a competitor.
Technical analysis can be used with any security with a history of trading data. This includes things like stocks, futures, commodities, and currencies. Technical analysis operates from the assumption that past trading activity and price changes of a security can be valuable indicators of a security's future price movements. Professional investors and analysts often use technical analysis in conjunction with other forms of research such as fundamental analysis to make buy, sell, and hold decisions.
Hundreds of patterns and indicators have been developed over the years by researchers for use in technical analysis and to support various types of trading systems. Some indicators are focused on identifying current market trends, while others are focused on determining the strength of a trend.
Types of Technical Indicators
Moving Averages
Pricing Trends
Chart Patterns
Volume and Momentum
Oscillators
Support and Resistance
Example
One of the most popular and easy to use indicators in technical analysis is the Moving Average. A moving average is a simple calculation that averages a given set of prices over a specific number of days in the past. The 3 month chart below illustrates an example of a 20 day moving average for the NASDAQ ETF TQQQ. The chart illustrates the daily ETF price over the last 3 months (black line) and the 20 day moving average over the last 3 month (red line). Traditionally, analysts and traders take bullish or bearish (buy/sell) positions on an investment when it moves above or below the moving average line. In this case, when the ETF price (black line) crosses below the moving average (red line / red arrow) it is typically a bearish indicator (sell) and the ETF price is likely to fall. Also, when the ETF price (black line) crosses above the moving average (red line / green arrow) it is typically a bullish indicator (buy) and the ETF price is likely to rise. As you can see, using a simple moving average to make buying and selling decisions can be very helpful….and rewarding.
Technical Analysis Conclusion
At Verdia, we rely heavily on both fundamental analysis and technical analysis in our TradePro trading. We use fundamental analysis to find great companies and technical analysis to determine when to buy and sell those great companies. In next months article we will focus on fundamental analysis.
Happy Trading, Verdia