So, you want technical analysis explained in under 5 minutes? Ok, but if we go overtime don’t blame me. You should have read faster.
Before we start, I just want to let you know that technical analysis can be used to trade anything, but I’m going to start off using companies and stocks because it’s easier to explain that way.
The best way to describe technical analysis is to understand its counterpart and competitor for the hearts of traders, fundamental analysis. Fundamental analysis of stocks looks at the characteristics of a company to determine that company’s intrinsic value. The logic is that you figure out the value of the company and then look at the stock price on the market. If the price is lower than the value, you should buy with the expectation that it will increase towards the intrinsic value. If the market rates are higher, you should go short to make a profit.
Technical analysis is not concerned with the value of a company. It focusses on the price changes of the company within the market, with the belief that market forces rather than value, determine the price of the stock. In a sense, whilst fundamental relies on the expectation that the value is the ultimate determinant of price, and expects that the market will eventually correct to that value, technical analysis assumes that the market is always right, and tries to understand and exploit the market’s rationale for its pricing in order to make a profit.
So, whilst fundamental analysis simply is about determining value, technical analysis tries to understand the various forces that underlie market activities. It takes into account many diverse elements, including market (and group) psychology, trading patterns, past market activity in relation to volume or pricing, etc, etc. Functionally, it believes that the market activity in the past can provide insight into the rationale for future market activity and trading, and thus much of the analysis is focused on the expectation that studying existing market activities will provide insight into potential future market movements.
As a result, technical analysis can be interpreted simply or possess multifactorial analytical elements which ascribes aspects of different causes to different situations. To determine future market movements, technical traders can either use one or many different methods to predict future market activity.
As a result of this complexity and multifactorial understanding, there are too many indicators to discuss in a basics guide. However, below are several useful examples that you will often see.
Volume indicators – These show the amount of previous trades made to indicate how much activity and interest is held in the stock.
Sentiment indicators – These methods assess the interest in a trade and indicate the direction of the market.
Oscillators – This collates the extremes of values to give and understanding of the trends towards overbought or oversold as a means of understanding how and when the trend will pivot.
Chart types – Different chart types will give you various views of market movements and activities to best allow your technique to show places to profit.
Trend lines and support and resistance lines – These show the general trend of the market and are usually the starting point of technical analysis. Support and resistance lines detail where market participants were in flux and are used to point to areas of contention amongst market participants in the movement of price from one point to another.
Chart patterns – These are similar to the trend lines and support / resistance lines but add the element of more detailed insight by understanding that markets continue to behave in a certain pattern. An initial movement by the chart is expected to ultimately have a certain outcome based on the understood and repetitive pattern.
So, whilst technical trading seems challenging at first glance, using its principles is both exciting and dynamic, allowing the trader to come closer to the underlying truth of the market. Whilst it will take longer than 5 minutes to master, it will be time truly well spent.
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