How do I start using technical analysis?

By Jean Folger AAA
A:

Technical analysis is a method of analyzing securities by evaluating current and historical price and/or volume activity. Technical analysts use this information to predict future price movements and to identify high-probability trade entry and exit levels. Technical indicators are mathematical calculations based on price and/or volume activity that can be applied to any price to visually display the calculations' results, providing investors and traders with a dynamic view of the markets. Some indicators typically appear directly over the price chart, while other are displayed below. Multiple indicators can be used on one price chart. Nevertheless, too many indicators, or the use of similar indicators, can lead to confusion and unreliable signals.

The best way to start using technical analysis is to approach it as you would any subject that you wanted to learn more about and do your homework. A growing number of resources, including books and articles, are available both in print and online formats. Many websites provide educational content in the form of videos, webinars and chat rooms. You might want to start by learning about the different types of technical indicators, including those that measure momentum, trend, volatility and volume. You do not necessarily have to understand the math behind the indicator (some of the math is quite advanced and complicated). Nevertheless, it is a good idea to at least understand the logic: what does this indicator measure and what can that tell me about the market?

Once you have a basic understanding of the various types of technical indicators, you can apply one of the indicators to a price chart of your choosing. A moving average, for example, one of the most popular and versatile technical indicators, calculates the average value of a security's price over a specified period of time. Moving averages are easy to interpret: if a price bar moves above the moving average, then the price is greater than the average over the X previous price bars. If the price bar moves below the moving average, however, then price has fallen below the average of the X previous price bars. Watching the indicator in a live market can help you understand how it works and what it means.

The study of technical analysis is a lifelong learning process. Starting with well-known indicators such as moving averages, stochastic oscillators and the relative strength index can help you learn how these valuable tools are used to help investors and traders make trading decisions.

It should be noted that technical indicators do not provide trading signals: it is up to each user to interpret the information delivered by an indicator or group of indicators. You may find that certain indicators "make sense" to you, and many technical analysts eventually develop precise and objective trading plans based on technical indicators.

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