Technical Analysis (or TA) refers to the analysis of chart trends and patterns from the past to predict the future movements of a stock (or a market) and identify potential trading opportunities. By using TA, a trader can distinguish trends, patterns and other trading signals and using this information to make more informed trading decisions. By using past price data and reading the chart, a trader can make higher probability trades, therefore increasing the likelihood of making money trading over an extended period.

Most people start off investing under the premise of “fundamental analysis”, that a company (or market) has an “intrinsic value”. However with a little experience in the markets soon it is discovered that this intrinsic value is very difficult to determine. Professional analysts often disagree over this intrinsic value, it is highly subjective. On top of this, companies’ growth, profit and other variables are constantly changing, making it next to impossible to find this true intrinsic value.

Technical Analysis on the other hand takes a step back from intrinsic value and emotional attachment to companies. Instead of trying to place a value on a company, technical analysts simply analyse what the market thinks about that company. The market is essentially on large mass of opinions. The chart shows what that mass psychology thinks of a stock, where people are buying and where they are selling. A prudent trader can read this mass mentality and trade accordingly. By reading the charts, and identifies trends, technical analysts can make more informed and predictable trades.

Technical Analysis is a cross between an art and a science. In its purest form, Technical Analysis considers only the actual price and volume data of a company, market, or instrument. Technicians generally search for distinctive and predictable price patterns, such as head and shoulders, double tops and bottoms, flags and triangles. Chartists also look for lines of support, resistance, channels and trend lines. Once these patterns have been identified, they can be effectively traded.

More advanced chartists will take advantage of indicators, such as moving averages, relative strength indicators, Bollinger bands and MACD (moving average crossover divergence). These indicators will help to solidify what the raw price data and give a trader a more rounded view of the stock price movements. Indicators such as a simple moving average give a broad indication of the trend of a stock; they are very helpful at identifying trends quickly. Taking advantage of some of the indicators that most charting software provides is a wise choice.

Technical Analysis is widely used amongst trader and financial professionals, and is often used by active day traders, market makers and pit traders. It is a highly effective method of trading and investing in the markets and takes the guess work out of trading. Traders and investors simply need to analysis the stock’s prevailing trends and trade with them.

Anyone with an interest in the market should have at least a basic understanding of Technical Analysis. TA would benefit long term investors’ right through to professional day traders. There is a massive amount of potential to improve one’s trading and investing performance, accuracy and most importantly, profitability.

About The Author The Everyday Trader offers online trading education courses. Our trading courses would suit beginners’ right through to advanced traders and investors. For more information, see our website. http://www.theeverydaytrader.com

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