Technical Analysis of financial markets is the study of market action using price charts to forecast future price direction. The basic philosophy of technical analysts is that all factors that influence price are quickly reflected in the price and the study of price action can reveal future performance. Technicians are concerned with the trends implied by past data, charts and technical indicators. Many believe that history repeats itself in the markets. A fundamental analyst on the other hand tries to ascertain the intrinsic value of a security in an effort to forecast future performance.
As Charles Dow, a pioneer of technical analysis in the late 1800’s said, “the market reduces to a bloodless verdict all knowledge bearing on finance, both domestic and foreign.” Other famous pioneers in the early half of the 20th century include W.D. Gann and R.N. Elliott. Over the decades and particularly with the dawn of the computer age, technical analysis has grown in sophistication and popularity and is widely practised in the analysis of markets today. In fact most online brokers and trading platforms offer free charting packages.
Technical analysis, is used to identify trade entry levels as well as targets for taking a profit or loss. There are many indicators used in technical analysis and reading a book on the topic is likely to leave one more confused than ever. The main point is that you don’t need to know every indicator in order to trade successfully. In fact, a major pitfall for those starting out in trading is using too many indicators in their analysis, thereby over-complicating the trading process. Most traders only use a handful of indicators in order to trade. However, it is good to know that other indicators exist and that there are traders out there who have a different view to what your analysis suggests.
Below is a list of popular trend indicators with further explanations on the links. It is an explanatory section rather than a comment on the effectiveness of the indicator. It is not necessary to learn how to apply them all and again I stress that most traders only use a few in their trading.
It is important to know the trend in the market. The trend refers to the overall direction in which the market is moving. Trend indicators help to identify this movement. Essentially the market has three different modes, an upward trend, a downward trend and a sideways trend. If you can identify the trend then you can adapt your strategy to take advantage of it. However, the time frame of your trading strategy is also important. For example, the trend of a financial security may be down on a monthly chart but up on an intra-day chart. A long term investor, therefore, may be selling while a day trader may be buying because they are following the trend relevant to their time frame. The indicator may also differ depending on the type of charts employed.
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