Technical analysis (5)

Technical analysis

Technical analysis is a vast collection of techniques traders use to study a market’s data, this is normally price but can be other metrics like volume. Traders are analyzing past price action in order to inform their view on future price action.

The main tool of a technical analyst is charts – these are the best way to visualize price data, we’ll show you more in our short course Getting Started with Charts.

The key assumption

Technical analysis is based on the principle that all current market information is reflected in the price. If you agree with this assumption, and all the factors that impact a market are already factored in, analyzing price is the most logical place the start.

This is a big assumption to make, which is why our approach is a bit more nuanced.

A self-fulfilling prophecy

Technical analysts look for similar and recurring patterns in price, based on these patterns, they form ideas assuming the price will behave in a similar way as it did before. The trader is making the assumption market participants will behave in the same way they did before.

If more and more participants are using technical analysis then it can become self-fulfilling. It is a difficult concept to get your head around but if we take it to an extreme you’ll see what we mean – if every participant in the market used the same analysis and thought the price would rise because of it, well the price would rise because the participants would bid it up. The actual market is not as extreme but hopefully, you understand the point.

No golden formula

There is no golden formula that is right the whole time. Technical analysis is subjective. The trading approach we are teaching you seeks to build up layers of evidence so we can, through analysis, try to tilt the balance of probabilities slightly in our favour.