In this article we’ll briefly explore the basics of technical analysis and the most important aspects you need to know to start using it in your daily trading.
Technical analysis is a method used to identify trading opportunities by analyzing price charts. Based on historical price movements and chart patterns technical traders try to predict future market directions and determine optimal entry and exit points for their trades.
Technical analysis can be applied to all instruments and asset classes in all types of trading. Our range of prop trading platforms have the necessary tools to perform this analysis.
Technicals vs Fundamentals
Technical analysis and fundamental analysis are the two main methods traders use to analyze markets:
- Technical Analysis: Focuses solely on market prices and repetitive patterns, ignoring other data;
- Fundamental Analysis: Investigates the factors driving market price actions, such as earnings and underlying economic data.
Traders may use either method in isolation or a combination of both. For instance, fundamentals might identify underpriced and overpriced markets, while technical analysis can pinpoint the best times to enter and exit positions.
Main Principles
There three key principles that govern technical analysis:
- History Repeats and markets move in repetitive patterns. This is why traders look at historical price patterns to predict the future market direction;
- All information is already Priced In the current price. Technical traders assume they do not need the learn the fundamentals behind the move, because market news, forecasts, data, interest rates etc are already priced and reflected in the chart;
- Prices always move in Trends. Most technical analysis strategies are based on the assumption that they can identify when an uptrend or downtrend has started. So they try to enter the trend and exit before it reverses.
Benefits of Technical Analysis
- Neutral Tool: Applicable to any instrument over any timeframe;
- Entry and Exit Points: Helps determine precise points for entering and exiting positions;
- Market Sentiment: Offers insight into general market sentiment, allowing traders to anticipate reversals and other significant movements.
Drawbacks of Technical Analysis
- Past Performance: Relies on historical data, which doesn’t guarantee future occurrences;
- External Factors: Can be blindsided by external events or data (e.g., poor employment statistics), which a fundamental analyst would consider;
- No Magic Approach: Success requires good risk management, discipline, and emotional control.
Key Concepts
Technical traders use various tools, but the core focus is on identifying support and resistance, trends, and ranges.
- Support and Resistance: Levels on a chart where the market has difficulty breaking past. Reaching these levels often signals potential price reversals.
- Trends and Ranges:
- Uptrend: Prices are generally rising;
- Downtrend: Prices are generally falling;
- Range: Prices are fluctuating between support and resistance levels.
By using indicators and patterns, technical traders aim to identify new trends as they form.
For further reading you can visit our FPT Trading Academy​.
