Technical analysis is the study of historical price action to identify patterns and determine probabilities of future movements in the market by studying price action and through the use of technical indicators and chart patterns.
Technical Analysis focuses on using a price chart to identify the trend, support, and resistance, and momentum to help traders get into and out of higher probability trades.
Examples of technical analysis tools
Technical analysts have a wide range of tools that they can use to find trends and patterns on charts. These include moving averages, support and resistance levels, Bollinger Bands, and more. All of the tools have the same purpose: to make understanding chart movements and identifying trends easier for technical traders.
Pros and cons of technical analysis
Pros of technical analysis
Being able to identify the signals for price trends in a market is a key component of any trading strategy. All traders need to work out a methodology for locating the best entry and exit points in a market, and using technical analysis tools is a very popular way of doing so.
Technical analysis tools are so commonly used, that many believe they have created self-fulfilling trading rules: As more and more traders use the same indicators to find support and resistance levels, there will be more buyers and sellers congregated around the same price points, and the patterns will inevitably be repeated.
Cons of technical analysis
There will always be an element of market behavior that is unpredictable. There is no definitive guarantee that any form of analysis – technical or fundamental – will be 100% accurate. Although historical price patterns give us an insight into an asset’s likely price trajectory, that is no promise of success.
Traders should use a range of indicators and analysis tools to get the highest level of assurance possible and have a risk management strategy in place to protect against adverse movements.