Technical Analysis Explained

Technical Analysis is essentially the study of price and volume action, primarily through the use of stock charts, to forecast the future price and price trends.

    The basis of Technical Analysis is formed on the following three premises:
  1. All relevant information is reflected in the price.
  2. Prices move in trends.
  3. History repeats itself.

The first basis of all relevant information is reflected in the price suggests that the market digests all relevant information that might have an affect on the price of the stock, e.g. fundamentals, business economics, geopolitical concerns and market psychology, and through the forces of supply and demand determines what the price should be. Therefore, it follows that only the study of the price action is required.

The second basis of prices move in trends suggests that prices tend to move in a persistent direction, albeit irregularly, once it is set in motion. Once a trend is in motion, it is more likely to continue than to reverse. Generally, trends can be classified into uptrends, downtrends or sideways.

The third basis of history repeats itself suggests that people will always be people. The bulk of Technical Analysis in many ways is essentially the study of human psychology in the market and through many decades of analysis, technicians are convinced that people tend to act in pretty much the same way during different cycles of the market and therefore similar price patterns would appear and provide an indication of what the price is most likely to do next.

Next: Building Blocks of Technical Analysis: Charts


    Table of Contents
  1. Introduction
  2. Technical Analysis Explained
  3. Building Blocks of Technical Analysis: Charts
  4. Building Blocks of Technical Analysis: Trendlines
  5. Building Blocks of Technical Analysis: Moving Averages
  6. Building Blocks of Technical Analysis: Indicators - RSI
  7. Building Blocks of Technical Analysis: Indicators - Bollinger Bands
  8. Building Blocks of Technical Analysis: Indicators - MACD
  9. Building Blocks of Technical Analysis: Price Patterns - Reversal Patterns
  10. Building Blocks of Technical Analysis: Price Patterns - Continuation Patterns
  11. Conclusion
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