Technical Analysis

Technical analysis is the study of market data such as historical and current price data and volume in an effort to forecast future market activity. Historical price data is the most commonly used available data that is implemented into the analysis.

Historical market data is saved and forms charts over various periods of time.

The technical trader can analyze varying periodical charts over a specific length of time for the basic purpose of picking the entry and exit levels of a trade. By studying the chart the chartist is able to get information at a glance that will hopefully represent the direction of the instrument in the future.

There is a never ending argument between fundamentalists and technical analysts about which method of analysis will show the best results. Technical analysts will claim that all the fundamentals are already built into the price, and so apart from natural disasters and unexpected world events the current price shows the market's expected value taking all the known information into consideration. The chartists are in fact looking for patterns or repetitions in price movements to guess the likely outcome of future prices – in a word they are looking for trends.

Technical analysis assumes three main points,

1. Fundamentals are already built into the price

2. History has a habit of repeating itself – find what happened in the past and project it into the future.

3. Trends are key – establish whether the instrument is moving in a trend, and then follow it. Typically there are three variations upward, downward or side wards. Once the type of trend is established an entry point is picked for the commencement of the trade.

Over the years various mathematical manipulations were placed upon market prices and volumes. Theses manipulations (known as studies) helped the technical analyst focus on identifying the trend and the entry and exit levels.

As with any analysis, discipline is the most important aspect of the study. If your studies showed that something was to occur, then follow your studies – do not let the market change your plan. If you were wrong then you were wrong, but stick to your game plan.