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Technical Analysis Explained: Learn How to Predict Stock Trends

In the context of the stock market, what is technical analysis? How can TA (technical analysis) help an investor make better decisions?

Technical Analysis Definition

Essentially, technical analysis is the study of past price movements to guess at future ones.
Technical analysts will typically use price charts, trading volume, trends and complex formulas to arrive at their conclusions. Some may compare this to forecasting the weather – it is part math and science mixed with art and trained intuition.

There are a wide range of definitions available for technical analysis. Some feel that it should be completely based on price and volume movements with no regard what-so-ever to the valuation ratios or any piece of fundamental data. Others will just use TA as another tool to give indications along with fundamental data.

Technical analysis covers price charts as well as their derivatives such as Bollinger Bands and Moving Averages. Charting trendlines and pattern recognition is discussed in another section while this will be geared more toward the mathematically derived technical analysis indicators. While this may sound difficult there are technical analysis software that you can use to help automate a lot of these process.

Technical Analysis Assumptions

Advents of technical analysis will often believe (at least partially) in the following ideals:

  • Current price is fair price and includes all known data - Believing this dispels the idea that the stock is greatly undervalued because of some little known detail. The pure technical analyst believes that all factors are already worked into the current share price. He or she is merely trying to determine how market mentality will sway the share price in the future.
  • Price movements fit into known patterns - Some believe that the market is completely random (such as the Random Walk theory). The technical analyst asserts that historical data can be studied to give indications on future movements.
  • What is happening is more important than why it is happening - A technical analyst will not spend his time trying to determine why the stock went up or down. Fundamental analysts may point to economic data, earnings, or some other news item to assert why the price is moving. The technical analyst is only interested in what the stock is currently doing with little regard as to the reasons.

Basic Steps of Technical Analysis

Generally speaking, technical analysis is done from broad to specific. The investor may first analyze overall market performance with the aid of an index, then study sector or industries, and finally the stock. As well, they usually look at a very broad window of trading such as a yearly chart and then narrow their focus to a shorter term trading frame.

A closer look at some of the common tools used in technical analysis with a view to studying price and volume patterns will assist most traders to improve in predicting price movements.

Technical Analysis Articles

Technical Analysis Charts: Charting Range, Chart Types & Patterns 7 articles
Learn about Technical Analysis and Charting. Find out which Chart Type you should be using and learn about the most common Chart Patterns
Technical Analysis Indicators: Leading versus Lagging Indicators
Technical analysis indicators come in two basic varieties: leading and lagging. A trending market works well with lagging indicators, while a trading market more profitable with leading indicators.
Trend Following Indicators - Part 1: What Is a Trend?
Learn about trend following indicators, ADX, Wilders DMI, Aroon and MACDs. Being able to determine a trend is one of the most important concepts in technical analysis.
Trend Following Indicators - Part 2: Trading The Average Directional Index (ADX)
The ADX is an oscillator type indicator that is used to determine the strength of the trend. Learn how to trade the Average Directional Index ADX.
Trend Following Indicators - Part 3: The Directional Movement Index (DMI)
The most common way to trade the DMI indicator, is to enter a trade at the crossover point. When the red crosses above the green, go short. If the green crosses above the red, go long.
MACD Indicator Explained
The Moving Average Convergence Divergence (MACD) is a combination of moving averages designed to signal a change in trend. Learn the 3 three common approaches when trading the MACD.
Technical Analysis - Momentum Indicators: ROC, Stochastic & RSI
Momentum in stocks usually refers to a rate of change, an increase or decrease in pressure. The most popular momentum indicators are Momentum, ROC, Stochastic and RSI.
The Relative Strength Index RSI Indicator Explained
Trading the Relative Strength Index profitably is what separates the good traders from the bad. We will now discuss a few common methods of trading the RSI.
Stochastic Indicator Explained
The goal of the Stochastic Oscillator (Fast, Slow, and Full) is to determine if the stock price is in the upper or lower trading range over a set amount of time. Learn the three basic ways to trade the Stochastic Oscillator.
Momentum Following Indicators: The TRIX Indicator
The TRIX indicator has become a well used method for momentum traders to determine buy and sell signals. The goal is to super smooth the data security to reduce the volatility and whipsaws.
Volume Following Indicators In Technical Analysis
Many volume trading indicators exist such as the Money Flow Index, On Balanced Volume, Accumulation and Distribution. Whatever methods are employed to track volume, a careful study into how volume works will greatly improve your trading.
Volume Indicators: On Balanced Volume (OBV) Indicator
There are a few ways to profitably trade the OBV: divergence and crossovers. Whether you use OBV to spot divergences in prices, or to play smaller volume breakouts, this tool is best used in conjunction with other tools.
Volume Indicators: Money Flow Index (MFI) Indicator Explained
There are three key signals to use to trade profitably with the Money Flow Index Indicator: divergences, overbought / oversold signals, and crossing of the 50.
Volume Following Indicators: Percentage Volume Oscillator (PVO) Indicator
Just like the MACD, the Percentage Volume Oscillator starts with the 12 day moving average and subtracts the 26 day moving average. Here three main signals are generated with the PVO.
Technical Analysis: The Secret of Moving Averages Explained
Moving Averages are powerful indicators. They can tell you about trends and buy and sell signals generated. Continue reading to learn the secret of Moving Averages.
Learn How To Trade Support and Resistance Levels
Perhaps one of the strongest concepts in technical analysis is support and resistance. Support and resistance are great clues as to profitable entries and exits, and particularly powerful when combined with other indicators in a complete trading strategy.
Technical Analysis: Parabolic Stop and Reversal (PSAR) Indicator
Developed by technical analyst Welles Wilder who also made the RSI and ADX indicators, the Parabolic Stop and Reversal system has proved a worthy indicator for expert traders. The goal of the PSAR is to determine a trend, and then establish buy and sell signals on that trend.
Technical Analysis: Stop Loss & Trailing Stop Loss Orders
Having an exit strategy is vital to the success of any trader. While a variety of methods exist, a stop-loss order is a simple and proven method to capture gains and limit loss.