If you're new to trading, you're likely to come across the term 'technical analysis'. Technical analysts use past price data to predict future price movements. They do this by using a range of trading tools that identify price patterns. Read our two-minute explainer to find out everything you need to know.
This article at a glance:
- Technical analysis uses specific metrics to make informed predictions about future market movements.
- By examining market-based indicators, traders attempt to make accurate predictions about where the price of an asset is headed.
- Common indicators include moving averages, support and resistance levels, RSI, MACD and more.
What does technical analysis mean?
Technical analysis is an analytical approach to trading and investing. It uses specific metrics to make informed predictions about future market movements. It differs from fundamental analysis, which looks at the asset's 'true' value by analyzing metrics such as sales and earnings reports.
Technical analysis focuses on trading activity statistics, such as volume, moving averages, and price trends. By examining these market-based indicators, traders attempt to make accurate predictions about where the price of an asset is headed.
How does technical analysis work?
To understand this, it is worth looking at the indicators used to analyze market patterns. There are several established indicators you can use, but the most widely used ones are:
- Trend lines: These manual indicators follow the general movement of prices to understand which direction they are taking.
- Moving averages: These track price movements over a period of time. This time can be as short as a minute, or beyond 200 days.
- Support & resistance: These are high (resistance) and low (support) levels at which prices sustain themselves. When they break through these levels, the market can be expected to shift.
- Correlation: Correlation helps to determine the relationship between two assets, whether positive or negative.
- Moving Average Convergence/Divergence (MACD): The MACD indicator compares different moving averages to indicate possible bullish or bearish trends.
- Relative Strength Index (RSI): This is a momentum indicator that shows how quickly prices change and to what extent.
Read our detailed explainer on these and other indicators, as well as important charts.
How to get started with technical analysis
Before you get started, read up on the definitive concepts, indicators, charts, and strategies that form the basis of any solid technical analysis. Learn all you need to know about technical analysis from our beginner-friendly guide.
Once you have got to grips with the essentials, start practicing. Trade on a demo account to practice your analytical approach in real-market conditions. This is a risk-free way to know if you are making the right trading decisions based on your technical analysis.
Once you’re confident with your approach, it’s time for the real deal. Start trading with a live account using small amounts to make yourself comfortable with market volatility.
Remember, practice makes perfect. Don’t stop trying and testing new strategies, and don’t hesitate to return to your demo account to put your new ideas to the test in a risk-free environment.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorized to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.