Definition of Technical Analysis

Definition of Technical Analysis

Technical Analysis?

The term “technical analysis”: technical, but it’s actually pretty simple. Essentially, it’s a strategy an investor may use to examine an investment chart and attempt to forecast its future performance. Some investors may use technical analysis to attempt to identify when to enter or exit a stock position. When performing technical analysis, investors can use a variety of techniques and tools to analyze a chart. In this video, we’ll focus on a few technical analysis basics including trend, support, and resistance, price patterns, and technical indicators.


The trend :

The trend is the general direction a stock’s price is moving. There are three kinds of trends up, which is a series of higher highs and higher lows; down, which is a series of lower highs and lower lows; and sideways, which has roughly equal highs and lows. Some investors determine a stock’s trend by identifying the direction of its highs and lows. The trend is important because a lot of traders believe that the price will generally continue in the same direction it’s been going. These investors would anticipate a stock with a strong uptrend to continue to rise, while one with a strong downtrend will continue to fall. Some investors draw lines to attempt to identify the trend. Traders can also draw lines to connect highs or to connect and lows. These lines are known as support and resistance levels,


Support and resistance :

Support and resistance are price levels. If the price breaks support or resistance level, it could be a good signal to enter or exit. For example, suppose a stock breaks through resistance, which is the level it repeatedly pulled back from in the past. Because it broke through resistance, an investor may believe that there’s a good probability that the price will continue to rise. So if the price broken resistance may be a good time to enter. On the other hand, if the stock fell past a support area, it may continue to fall. This could be considered a good time to exit. After connecting support and resistance levels, a stock’s price movement may resemble a certain shape. These shapes are called price patterns and are another technical analysis technique.


Price patterns :

Price patterns allowing investors to attempt to predict more specific movements and try to point out even more precise entry and exit signals. There are many different price patterns. Some examples like triangles or flags and more complex patterns like head and shoulders or triple tops.
Let’s look at an example. This is called an ascending triangle, and it forms when the price’s highs are hitting resistance while its lows are steadily rising. Some traders interpret the narrowing between the highs and lows as a signal that the stock’s about to break through resistance. If it does, the stock’s price is expected to rise in value right after the breakout, but not all investors exclusively use support and resistance and price patterns. Drawing lines and finding shapes can be subjective. Because of this, some investors may use technical indicators.


Moving Average :

Technical indicators are mathematical calculations based on the price, volume, used by traders who follow technical analysis Each indicator displays chart data, in a unique way, giving traders another perspective of the stock’s performance. Because technical indicators are created using data, they may give traders a more objective way to examine a stock’s performance. for example, moving average line. This indicator averages the stock’s price over a period of time and plots it as a line, which can determine the trend. Moving averages can be calculated for any period of time, but one of the most common is 50 days.

So what does a moving average tell you about an investment? Imagine a stock’s price crosses above its 50-day moving average. This may indicate that the stock is outperforming its recent history. This could be an entry signal. Similarly, if the stock begins to fall and dips below its moving average, it could be an exit signal. Moving average lines are only one of many technical indicators investors may use. Other common indicators include price envelopes, Bullinger bands, stochastic oscillators, and the relative strength index.

At this point, we’ve covered some basics of technical analysis. One thing to keep in mind is that technical analysis can help you identify potential entry and exit signals, but it offers no guarantee of success. After all, there is no way to predict the future. We’ve only covered the tip of the technical analysis iceberg. Learning how to use the techniques and tools we’ve discussed, as well as the many others out there can advance your technical analysis skills.