What is Technical Analysis?

Technical Analysis

Technical analysis is a tool, or method, used to predict the probable future price movement of security – such as a stock or currency pair – based on market data.

The theory behind the validity of technical analysis is the notion that the collective actions – buying and selling – of all the participants in the market accurately reflect all relevant information pertaining to a traded security, and therefore, continually assign a fair market value to the security.

Technical traders believe that current or past price action in the market is the most reliable indicator of future price action.

Technical analysis is not only used by technical traders. Many fundamental traders use fundamental analysis to determine whether to buy into a market, but having made that decision, then use technical analysis to pinpoint good, low-risk buy entry price levels.

Technical traders analyse price charts to attempt to predict price movement. The two primary variables for technical analysis are the time frames considered and the particular technical indicators that a trader chooses to utilize.

The technical analysis time frames shown on charts range from one-minute to monthly, or even yearly, time spans. Popular time frames that technical analysts most frequently examine include:

  • 5-minute chart
  • 15-minute chart
  • Hourly chart
  • 4-hour chart
  • Daily chart

The time frame a trader selects to study is typically determined by that individual trader’s personal trading style. Intra-day traders, traders who open and close trading positions within a single trading day, favour analysing price movement on shorter time frame charts, such as the 5-minute or 15-minute charts. Long-term traders who hold market positions overnight and for long periods of time are more inclined to analyse markets using hourly, 4-hour, daily, or even weekly charts.

Price movement that occurs within a 15-minute time span may be very significant for an intra-day trader who is looking for an opportunity to realize a profit from price fluctuations occurring during one trading day. However, that same price movement viewed on a daily or weekly chart may not be particularly significant or indicative for long-term trading purposes.

How to be a successful trader using Technical Analysis?

  1. Find a trading approach that suits you

The very first thing one should figure out is the right trading method that suits him, as there is no right size common approach that can guarantee success to everybody,” says he.

“A person has to know whether he is comfortable with fundamental or technical, long term or short term, certain types of markets, wider risk or less risk… You can go through a whole checklist of things and find out it’s different for each individual. It’s a discovery process, an evolutionary process

  • Trading approach should have an edge

A trading approach may be reasonable, but if it lacks an edge, it may not be able to provide success. “It can make all the sense in the world. On paper, it might sound reasonable, but markets do not pay off for approaches that sound reasonable. They pay off for what works, and what works may often be very counter-intuitive

  • Manage risk properly
    After developing a method that has an edge and that suits a trader’s personality, the next step should be to plan appropriate risk management.

  • Follow strict discipline

You need the discipline to take your method, with the edge and the risk management, and stay true to it. There are trades that are going to look scary and you’re going to really not want to take them, but if it’s part of your methodology, you take them

  • Be flexible
    Flexibility is another key trait that separates great traders from the ordinary ones, as they’re able to adapt and take decisions according to the prevailing situations.

Ability to make bold decisions
Successful traders always make tough trading decisions that are contrarian and uncomfortable which an average trader hesitates to take.