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 types of data are necessary to make a technical analysis?

    Understand what technical analysis is, the basic theory behind employing it and what data inputs are needed to conduct it. Read Answer >>
  2. What is the difference between market indicators and economic indicators?

    Read about the differences between technical market indicators and general economic indicators, and learn how traders and ... Read Answer >>
  3. How are moving averages used in trading?

    Moving averages are very popular tools used by technical traders to measure momentum. The main purpose of these averages ... Read Answer >>
  4. Would a slow stochastic be effective in day trading?

    Given the hundreds of indicators that are available to traders, finding the appropriate technical tools to use in day trading ... Read Answer >>
  5. What are the best technical indicators to complement the Moving Average (MA)?

    Learn about some of the common confirmation tools and techniques that traders and analysts use in conjunction with moving ... Read Answer >>
  6. What technical indicators can I use to find undervalued stock?

    Investors seeking new ideas may want to look to technical analysis to see whether the market has undervalued a particular ... Read Answer >>
Related Articles
  1. Trading

    Using Technical Indicators To Develop Trading Strategies

    Unfortunately, there is no perfect investment strategy that will guarantee success, but you can find the indicators and strategies that will work best for your position.
  2. Investing

    How to Use Trading Indicators Effectively

    Careful and effective use of technical indicators can improve your odds of finding an investment’s best entry and exit points.
  3. Financial Advisor

    Moving Average

    Learn about this basic technical indicator and how you can use it to chart the value of a security's price over a set period.
  4. Trading

    Using Trading Indicators Effectively

    Select multiple indicators, avoid information overload and optimize indicators to effectively use technical analysis tools.
  5. Trading

    How To Build A Trading Indicator

    Wondering how people like Elliott and Gann built their famous trading tools? Learn the basics of constructing an indicator.
  6. Trading

    Introduction to Types of Trading: Technical Traders

    Learn about the different traders and explore in detail the broader approach that looks to the past to predict the future.
  7. Trading

    Exploring Oscillators and Indicators

    Find out how to use these technical analysis building blocks.
  8. Financial Advisor

    Pivot Points

    Learn more about this technical indicator and how you can use it as a predictive tool.
RELATED TERMS
  1. Ease Of Movement

    A technical momentum indicator that is used to illustrate the ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
  4. Technical Indicator

    Any class of metrics whose value is derived from generic price ...
  5. Confirmation

    The use of an additional indicator or indicators to substantiate ...
  6. Demarker Indicator

    An indicator used in technical analysis that compares the most ...
Hot Definitions
  1. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  2. Demonetization

    Demonetization is the act of stripping a currency unit of its status as legal tender and is necessary whenever there is a ...
  3. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
  4. Redlining

    The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city ...
  5. Nonfarm Payroll

    A statistic researched, recorded and reported by the U.S. Bureau of Labor Statistics intended to represent the total number ...
  6. Conflict Theory

    A theory propounded by Karl Marx that claims society is in a state of perpetual conflict due to competition for limited resources. ...
Trading Center