[vc_row][vc_column][vc_empty_space height=”80px”][vc_column_text]

An Intro To Technical Analysis – a Beginners Guide

If you are new to the idea of technical analysis and looking for a place to start, then you’ve come to the right place.

There are two main methods that traders use to analyse & assess the financial markets – technical analysis and fundamental analysis.

Fundamental analysis is where you analyse an entity’s financial statements to evaluate the value of their business. While technical analysis focuses on statistical analysis of a company’s share price. Technical analysis can indeed appear complicated and confusing. But with the right educational tools you can learn about it quickly and become a better trader.

What is technical analysis?

Technical analysis is when an trader uses statistical analysis to predict and forecast the price direction of an asset. Technical analysts do not attempt to measure a financial assets’ intrinsic value like fundamental analysts. Instead they use charts and other analytical tools to identify price movement patterns to evaluate a company’s overall strength. These patterns can then be used to make investment decisions.

The three assumptions of technical analysis

1. History very often repeats itself
Technical analysts believe that price movements are repetitive in nature and can be attributed to market psychology, where trends tend to repeat themselves because of predictable human emotions like excitement, greed and fear. Technical analysts use chart patterns to analyse said emotions to try find and understand market trends.

2. Prices move in trends
Technical analysts believe that prices move in short, medium and long-term trends, i.e. that a company’s stock price will repeat a past trend rather than move erratically.

3. The market discounts everything
Many trading experts believe technical analysts are short-sighted because they only consider price movements and do not include fundamental factors into their decision making. However, technical analysts believe that a stock’s price already reflects everything that has or could affect a company – including fundamental factors. This belief eliminates the need to consider fundamental factors separately before making an investment decision. The only thing remaining is the analysis of price movements, which technical analysts view as the product of supply and demand for a particular stock in the market.

Is technical analysis only for stocks?

No, technical analysis is not for stocks only – you can use technical analysis on any asset class (commodities, indices, FX, fixed income, cryptocurrencies etc.) that has historical trading data. In fact, technical analysis is far more prevalent in commodities and fx markets where traders focus on short-term price movements.

Now that you understand the basics behind technical analysis, we’ll start explaining how it works. One of the best ways to understand how technical analysis works is to compare it to fundamental analysis – see below for more.

Fundamental analysis vs. technical analysis

There are a few differences between technical analysis and fundamental analysis;

Charts v statements
Fundamental analysts start their analysis with a company’s financial statements, whereas technical analysts begin theirs with charts.

A trader using fundamental analysis will look at a firm’s income statements, balance sheets and cash flow etc. This will help determine a company’s value. Technical analysts do not believe in analysing a firm’s financial statements since they believe that a company’s stock price has already factored this in. Instead, the technical analyst will focus on the charts of a company’s stock price.

Timeline
Technical analysts typically have a shorter-term approach to investing, as opposed to fundamental analysts, who take a longer-term approach. ​​​​​​​Fundamentally-focused traders often wait a long time before a company’s intrinsic value is reflected in the market.

Trading vs. investing
Technical analysis and fundamental analysis have different goals. Technical analysts try to identify many short- to medium-term trades (trading) where they can flip a stock, while fundamental analysts try to make long-term investments (investing).

Can you use both?
It’s a common misconception that you have to focus on one or the other to be successful. But this is incorrect. Many traders combine both techniques with just as much success. As an example, an investor may use fundamental analysis to identify an undervalued stock and use technical analysis to find a specific entry and exit point for the position.

Recommended CFD Brokers

TD365 offer a simple, easy-to-use trading platform – everything is well positioned and markets are easy to find. They’re also one of the cheapest CFD brokers going round, with their tight, fixed spreads, have a generous welcome bonus, offer a world-class mobile app to trade on, and are owned & operated by an ex-trader. Read Review >

Australian-owned & operated with 12 years industry experience, FP Markets have won over 30 industry awards for their superior customer service, fast execution, client satisfaction and also for their dedication to quality educational content. FP Markets use the IRESS trading platform which means you are trading CFDs with direct market access. Read Review >