What Does Technical Analysis Do?
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Its goal is to identify trends and make trading decisions based on those trends. Technical analysts use charts and technical indicators to study price and volume data and look for patterns that can suggest future activity.
The idea behind technical analysis is that market trends, as shown by charts and other technical indicators, tend to repeat themselves, so the analyst can use that information to make informed trading decisions. Technical analysis can be used in conjunction with other forms of analysis, such as fundamental analysis, to make investment decisions.
What are the 4 Basics of Technical Analysis?
The four basics of technical analysis are:
Chart analysis: involves the use of charts to identify patterns and make trading decisions.
Indicators: statistical tools used to analyze price and volume data, providing information about trends and potential reversal points.
Trend analysis: the study of price trends and their potential continuation or reversal, often using trend lines and moving averages.
Support and resistance: key price levels where demand and supply are believed to be strong, which can act as barriers to price movement.
Below is an example of technical analysis on the S&P 500 (SPY) ETF. The patterns/trendlines, as well as support/resistance levels, were automatically generated by our preferred trading platform TrendSpider.
Does Technical Analysis Really Work?
The effectiveness of technical analysis is a subject of debate among market participants and researchers. Some proponents argue that technical analysis can provide valuable insights into market trends and can be used to make informed trading decisions. Others argue that technical analysis is based on past performance, which may not be indicative of future results, and that it can be subject to interpretation bias.
There is some empirical evidence to support the use of technical analysis, although the results are mixed, and the level of success can depend on various factors such as the security being analyzed and the time frame considered. It is important to note that no method of analysis, including technical analysis, can guarantee future results.
Ultimately, whether or not technical analysis works for a particular individual or organization may depend on factors such as their experience and level of skill, as well as their risk tolerance and investment goals. As with any form of analysis, it is recommended that technical analysis be used as part of a comprehensive investment strategy.
