An introduction to technical analysis

Technical analysis involves the study of objective and measurable factors, primarily price movement and trading volume.



What is technical analysis?

The premise is that, at any given time, all worthwhile trading information is reflected in the price. Then the study of historical price movement helps to show the eagerness with which investors are prepared to buy or sell a particular financial instrument. Analysts can then use this data to help forecast where prices will head in the future. Technical indicators use basic price and volume data. This is then manipulated mathematically and typically displayed on or below a chart to provide trading signals.

In essence, technical indicators are used to alert, confirm and predict. An indicator can act as an alert to study price action a little more closely. For instance, rising volatility could signal that a market is about to break out of its trading range. Confirmation could then be sought by looking for a moving average cross-over, or a break of previous support or resistance. Then there are other technical indicators, such as the Linear Regression Forecast, which can be employed to help predict the direction of future price moves.

Spread Co offers a comprehensive selection of technical indicators. This list should be treated as a menu rather than a challenge. The best approach is to focus on two or three indicators and choose ones which complement each other. For instance, rather than looking at two trend-following indicators, try pairing up a Bollinger Band overlay with a MACD, TRIX or Momentum Oscillator.

Technical indicators can be extremely helpful in analysing financial markets. However, it is important to note that technical analysis is fallible. Don’t rely on one indicator alone, and be aware that many signals thrown out by the indicators can be interpreted in different (and often contradictory) ways. Be wary of trading on a signal that runs counter to the major market trend. So look for buying opportunities in upwardly-trending markets, and selling opportunities in downwardly-trending ones. Also, bear in mind that momentum oscillators work best in ranging markets.

In future articles we will provide a brief overview of the indicators available on the Spread Co platform. But we would advise more in-depth study before incorporating any indicator or other method of technical analysis into an overall trading strategy.

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