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Technical analysis is the forecasting of market prices by means of analysis of data generated by the process of trading. It relies on the assumption that markets discount everything except information generated by market action, all you need is data generated by market action. It is the study of prices and volume, for forecasting of future stock price or financial price movements. Technical analysis can help investors anticipate what is "likely" to happen to prices over time.
Technical analysis is not an exact science. It's an art and takes considerable experience. But don't worry everyone can learn it.
Technical Analysis Basic Principles. Technical Analysis is based on these assumptions
Price Discounts Everything
Technical analysts believe that the current price fully reflects all information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. After all, the market price reflects the sum knowledge of all participants, including traders.Stock Market 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.
Price Trends
Technical analysts or chartists believe that profits can be made by following the trends. In other words if the price has risen, they expect it to continue rising; if the price has fallen, they expect it to continue falling. However, most technicians also acknowledge that there are periods when prices do not trend.
Past trends indicate the future - History Repeats Itself
Technical analysts believe that investors as a whole repeat their behavior and they assume that there is useful information hidden within price histories; that it is a way of analyzing the past actions of people in a particular market as reflected by their actual transactions.
Technical Analysis Tools
Every technical analyst needs charts and indicators to study market. Three common types of charts are used by investors: Line Chart, Bar Chart and Candlestick Chart.
Line Chart is formed by plotting one price point, usually the close, of a security over a period of time. Connecting the dots, or price points, over a period of time, creates the line.
Bar Chart is drawn by high, low and closing price. Sometimes, bar charts are drawn by opening price. In this case, bearish bars are drawn with another color.
Candlestick Chart A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day's price range. A wider body marks the area between the open and the close.
Related Articles
Fundamental Analysis
Identifying Trends
Price trend and Volume