Introduction to Technical Analysis
Technical Analysis
Technical analysis involves studying market action using charts to forecast future price trends,
including price, volume, and open interest. This analysis applies to short-term, medium-term, and
long-term trading. Technical analysts develop trading rules and systems using various theories,
charting tools, and indicators.
Three Principles of Technical Analysis
- Market Discounts Everything: Technical analysis focuses on past trading activity rather than
external factors like the economy, fundamentals, or news. Analysts believe all relevant
information is already reflected in the price action, providing a comprehensive view of
market participants‘ perceptions. - Prices Move in Trends: Analysts believe prices trend in specific directions—up, down, or
sideways. Recognising these trends helps predict future price movements. - History Tends to Repeat Itself: Analysts hold that investors collectively repeat past
behaviours. This repetition, driven by emotions, allows for the identification of recognisable
and predictable price patterns on charts.
Types of Technical Analysis
- Charting Analysis: This involves observing price movement charts (bar charts, candle charts,
line charts). Analysts draw trendlines, channels, support and resistance lines, and examine
chart patterns and gaps to determine price direction and potential reversal points. - Mechanical Analysis: This uses moving averages, oscillators, envelopes/bands, and other
technical indicators to gauge market sentiment. The aim is to establish a clear market
sentiment using these tools.