What is Technical Analysis?
Traders usually define themselves as being either a ‘Fundamental’ trader or a ‘Technical’ trader – it’s up to you to decide which strategy works best for you.
Technical Analysis is the method of predicting a future price based on how the market acted before based on trends, cycles, reversals and consolation periods. Technical Analysis is often a measure of predicted price moves – it works to identify patterns that suggests what an asset (this could be either Forex pairs, Stocks, Indices or Shares) will do in the future.
Here’s an example of the interest rate differential between GBP (Pounds Sterling) and USD (United States Dollars):
What are the different factors of Technical Analysis?
Key factors that can help traders with Technical Analysis include:
Liquidity – If you favour Technical analysis, you should be aware that it should only be used on liquid products so that money can move freely for traders to easily buy and sell.
Reversals – The current trend stops and price either moves in the other direction. Sometimes seen with a spike in trading volume, as both Bullish and Bearish trends are competing.
Corrections – Trends are interrupted by corrections coming from the opposite direction.
Trends – When a product moves from one price level to another in a specific pattern.
Price patterns – Where multiple price patterns are repeated reflecting the current market buyers’ thinking. As a trader, you could try to recognise these patterns to predict the next cycle.
Candlestick formations - Charts made up of multiple candlesticks displaying the highs, lows, opening and closing prices of a product and highlight continuation, consolidation and reversal patterns.
Resistance – When the price reaches a level that constantly attracts more sellers than buyers.
Support – Opposite of resistance as price drops to a level that has constantly attracted more buyers than sellers.
Tic – The measure of every trade, whether up or down, within a time period.
Volume – Measure of the number of Shares traded over a specific time period. If you’re trading on the Forex market, it’s important to know that this information isn’t available so you should use ‘tic’ volume for comparison.
Momentum – Also known as the Rate of Change, this shows the strength of recent price moves. If you choose to concentrate on momentum, you may look to benefit from strong trends and then exit when the trend losses momentum.
Probability – An approach allowing traders to look for high probability set-ups where they can predict future price action in the market.
Technical analysis is just one of two analysis methodologies – the other is Fundamental analysis. If you’d like to know more about Fundamental analysis, we’ve put together a handy guide.