A Premier on Technical Analysis Free eBook Download
Technical Analysis (Versus Fundamental Analysis)
Technical analysis is a method of forecasting price movements by looking at purely market-generated data. A trader who uses technical analysis (sometimes called a technician or chartist) is essentially concerned with two things;
- what is the current price?
- What is the history of price movement?
Most will also keep a close watch on technical indicators, which provide feedback on both the price and market (e.g. moving average, volume, momentum, volatility, open interest, etc). Ultimately, technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.
Almost every trader uses some form of technical analysis. Even the most reverent follower of market fundamentals is likely to glance at price charts before executing a trade. At their most basic level, these charts help traders determine ideal entry and exit points for a trade. They also provide a visual representation of the historical price action of whatever is being studied. As such, traders can look at a chart and know if they are buying at a fair price (based on the price history of a particular market), selling at a cyclical top, or perhaps throwing their capital into a choppy, sideways market. These are just a few market conditions that charts identify for a trader. Depending on their level of sophistication, charts can also help much more advanced interpretation of the markets.
On the surface, it might appear that technicians ignore the fundamentals of the market while focusing only on charts. However, a technical trader will tell you that all of the fundamentals are already represented in the price. They are not so much concerned that a natural disaster or an awful inflation number caused a recent spike in prices as much as how that price action fits into a pattern or trend. And much more to the point, how that pattern can be used to predict future prices.
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