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Technical Analysis | Introduction to Technical Analysis

What is Technical Analysis?

Technical analysis is a security (financial instrument) analysis methodology for forecasting the direction of prices. It is based on the study of past data, primarily price and volume. Like weather forecasting, technical analysis does not result in an accurate predictions about the future. Instead, it can help investors anticipate what is likely to happen to price over time.

Technicians using charts search for, price chart patterns giving them a certain probability of a price in the near, medium or long term. One of the fundamental principles in technical analysis is that market’s price reflects all relevant information. So their analysis looks at the history’s security’s trading pattern rather than external drivers such as economic, fundamental and news events.

Another principle is that price action tends to repeat itself due to investors, collective tending toward pattern behavior. Technical analysis focuses on identifying trends and conditions. You do not need an economics degree to analyze a market index chart.

Technical analysis’s beauty lies in its versatility. The principles of technical analysis are universally applicable. Charts are charts. It does not matter if the time frame used is of 1 hour, 1 day or 1 month. It also does not matter if it is a stock, commodity or currency pair. The basic principles of technical analysis are applicable to any chart. Technical analysts consider the market to be 80% psychological and 20% logical. The price set by the market reflects the sum knowledge of all participants. These participants have considered everything under the sun and settled on a price to buy or sell. There are forces of supply and demand at work.

By examining price action determines which force will prevail. Therefore, technical analysis focuses directly on the bottom line. What is the price? Where has it been? Where is it going?