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What is technical analysis in trading?

What is technical analysis in trading?

Technical analysis is a method of evaluating the worth and probable future direction of security prices using charts and data concerning prices and volume.

This is the counterpart to fundamental analysis, which looks at the physical operations of a company and their place in the market to determine value.

Those who practice technical analysis are sometimes called “quants” or chartists because they believe that the most important information about a security will be found in the data on the price, volume, and the moving averages and volatility associated with them.

The school of technical analysis can be traced back to Dow Theory nearly 100 years ago. But with increases in computing power, more and more tools are being developed with each passing year, and institutional and retail investors are using them to develop strategies.. Technical analysis is most useful for short-term trading.

There are several common indicators that traders use for technical analysis in trading. A few examples include the Moving Averages indicator, MACD, RSI, Stochastics, Aroon, and more.

The MACD indicator, for example, is a frequently used technical trading indicator composed of several moving average lines in a specific combination.

By using the exponential moving average (EMA) over 12-day periods and subtracting the EMA of the 26-day periods, a line is plotted which is called the MACD. A "signal line" is then plotted on top of that line which is the 9-day EMA. A histogram is also usually included to indicate the divergence between the signal line and the MACD.

When the MACD and the signal line cross paths, these points of convergence are widely used as indicators that trends are starting or ending. When the histogram goes positive, it is said to be a bullish indicator, and bearish when negative.

The variables (time spans) of the lines can be switched up for different purposes or to double-check the signal; a short-term example would be 5-day, 35-day, 5-day.

Traders use technical indicators like MACD to make predictions about future prices. They verify how well a specific indicator works for a particular security.

Another very popular approach for technical analysis in trading is “Pattern Trading” and trading with trends. There are several common patterns like the Cup-and-Handle pattern, the Head-and-Shoulders pattern, the Pennant pattern, and the Broadening Wedge patterns. Each pattern is described in an article on Tickeron’s site. 

Trend trading seeks to capture an ongoing bullish or bearish trend and invest with momentum. Usually it’s best to use the help of Artificial Intelligence to determine whether a trend is confirmed over the short or long-term.

There are myriad ways to use technical analysis in trading, and which indicator or methodology a trader decides to use usually depends on their experience, skillset, and the quality of the tools (A.I.) available to help them find trade ideas.

Keywords: technical analysis, technical indicators, fundamental analysis, chartists, Dow Theory, quants, active trading,