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.

RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  3. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  4. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  5. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  6. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
Related Articles
  1. Stock Analysis

    The Top Rated Dividend Paying Stocks for 2016 (ABBV, BA)

    Discover five of the top-rated stocks that pay investors solid dividends that you may want to consider adding to your investment portfolio in 2016.
  2. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  3. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  4. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  5. Chart Advisor

    3 Charts That Suggest Now Is The Time To Invest In Real Estate (VNQ, SPG,PSA)

    Real estate assets have some of the strongest uptrends around. We'll take a look at three candidates poised for a move higher.
  6. Chart Advisor

    Stocks With More Upside Due to Bear Traps (TAP, SPY)

    A bear trap is a pattern that typically leads to at least a short-term rise in prices. Here are stocks exhibiting the pattern.
  7. Active Trading Fundamentals

    New Traders: Trade the Market in 5 Steps

    New traders shouldn’t throw money at securities without knowing why prices move. Follow these five steps to tilt the odds in your favor.
  8. Chart Advisor

    Watch For a Bounce in These Emerging Markets (BRF, PEK)

    While downtrends are clearly in control of the direction of many emerging market ETFs, short-term indicators suggest a bounce higher could be in the cards.
  9. Investing Basics

    Valuation Models: Apple’s Stock Analysis With CAPM

    The capital asset pricing model, or the CAPM, estimates the expected return of an asset based on the systematic risk of the asset’s return.
  10. Stock Analysis

    Will "FANG" Stocks Outperform in 2016?

    Facebook held the most bullish accumulation-distribution pattern into year’s end, telling investors to focus on this issue in 2016.
RELATED TERMS
  1. Golden Cross

    A crossover involving a security's short-term moving average ...
  2. Cup and Handle

    A pattern on bar charts resembling a cup with a handle. The cup ...
  3. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  4. Confirmation

    The use of an additional indicator or indicators to substantiate ...
  5. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
  6. Discounted Cash Flow (DCF)

    Discounted cash flow (DCF) is a valuation method used to estimate ...
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center