Updated: Mar 24
What is Technical Analysis?
Technical analysis is the study of market actions. It is a very well-known method of assessing possible market movements and determining previous activity in terms of patterns as well as proportions and duration. It is based on the analysis of volume, price action, open interest as well as market breadth, sentiment data, as well as the flow of money. It aims to discover potentially repeated patterns that can be identified in bar and chart formations, price cycles and seasonality, with an assumption of exists an element of certainty that is associated with these types of technical patterns.
Technical Analysis essentially serves two main functions
1. For Identification
2. For Forecasting:
1. For Identification:
It describes and identifies the price movement of the past and present. It is an historical record of the events that have occurred in the market. It gives a clear illustration of the actions of markets. It allows market participants to understand the way in which the market has behaved over time, which is a good indicator of its volatility average for a particular time frame and its most and least prices in the past, most common regions of consolidation the average duration and price deviation in the direction of market trends. It also shows degree of liquidity and market participation markets as well as the average level as well as the frequency gaps as well as the effect of different economic announcements regarding monetary policy on prices and market activity, and other such information. This information is particularly important prior to making any trade or investment decision
2. For Forecasting:
Once a particular market or price is recognized, the analyst can utilize this data to determine what the data really signifies before inferring the future price movement. The inference of a possible price movements is built on the assumption price patterns repeat in a reasonable amount and can therefore be utilized as a basis for price forecasts.
Forecasting Stock Prices Using Technical Analysis
Technical analysis is the assessment and forecasting of possible market behavior based on the actions and dynamics of the market. The movement and the dynamics of the market are best recorded through volume, price, and open interest actions. Charts provide an image of the events that have occurred in the market and technical analysts make use of this information to determine the potential for future price movements in the belief that price patterns are likely to repeat themselves or behave in a relatively consistent and predictable way. We will now focus our attention on the most popular terms used to describe technical analysis.
The following definition of technical analysis tells us that charting is the main tool used to forecast potential future price action.
Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.
The next definition of technical analysis tells us that the charting of past information is used to forecast future price action.
Technical analysis is the science of recording, usually in graphic form, the actual history of trading . . . then deducing from that pictured history the probable future trend.
Technical Information and Data:
Technical Analysts study market Action. Market action itself mainly consist of the study of
• Price Action
• Volume Action
• Open interest action
• Market breadth
• Flows of Funds
Of all the information analysts use in their work of which price is the most significant of them all, closely followed by volume actions. Price is made up of an opening high, low, and closing price. It is usually called OHLC data. OHLC data usually is used to describe the daily opening high, low and closing prices, however it could also indicate that the OHLC in any time interval that ranges from 1- minute bars up to monthly and annual bars.