Technical analysis is based on a set of techniques, with the purpose of predicting the future price of a particular asset, such as securities, commodities or currencies. Technical analysis is one of the most popular ways to determine the future price of for instance Bitcoin.
Technical analysis is based on statistical analysis, and the objective is to estimate the specific time points when an investor should buy or sell an asset. Compared to a fundamental analysis a technical analysis does not take into account different macroeconomic factors. The data being used to predict future value is read directly from a chart.
It is however important to note that there is no straightforward way to describe how a technical analysis should be performed. Over time, most successful traders develop their own method of analysis, that they stick to using. Being consistent and sticking to simple rules often lead to better precision and opportunities, as well as to an understanding of what went wrong. A common misconception is that successful traders always have loads of different rules and indicators/signals that they use. Some traders stick almost exclusively to trend and resistance analysis, whereas others advocate using mainly different types of moving averages. Some traders on the other hand combine several different methods.
Technical indicators are mathematical calculations – or they can even be something as simple as trendlines – that allow traders to identify when an asset is experiencing overbought or oversold conditions. By using historic price, volume and open interest information it is possible to forecast in what direction the financial asset is going. This underlying knowledge can help a trader identify different trading opportunities.
Below are some of the most common signals TA specialists use.
- The body represents the opening and closing price
- The wick plots the highest and the lowest price
- Closing prices usually create the line
- Reduces noise by its simplicity
- Trendline – a line drawn through the chart to show a trend
- Trendlines – the direction can be up, down or sideways
Support and Resistance
- Support occurs where a downtrend is expected to pause
- Resistance occurs where an uptrend is expected to pause
- Often used – cuts out the noise by generating an average
- Lagging indicators – based on past prices
- Volume – showing activity of the market players
- Complement – makes little sense to analyze volume alone
- Indicates overbought or oversold conditions
- Range from 0 to 100 (20 oversold, 80 overbought)
- Set of three lines that represents volatility
- More effective in sideways than in trending markets