What Is Technical Analysis In Trading?
As a trader, you need to understand how the price moves in the market. One of the methods to understand the market is technical analysis. The other one is fundamental analysis. Technical analysis is a method used in trading and investing to evaluate and forecast future price movements of medium trading such as stock market, currencies, commodities, futures index, and cryptocurrencies.
This analysis is based on the study of historical market data because historical price movements and patterns can provide insights into potential future price directions. According to the study, the price movement is likely to touch back to the previous historical data. So, what do you need to understand in this technical analysis part? Here we come out with six components of technical analysis that help you to understand the market.
1. Price Charts
The price chart is one of the components that traders usually use in technical analysis because it represents the transaction of price movement including the highest price, lowest price, open price, and closed price. Traders use various types of charts, such as line charts, bar charts, and candlestick charts to analyze the market.
2. Technical Indicators
Indicators are mathematical calculations based on historical price and volume data that were developed by some traders to make analysis easier. Traders can use technical indicators such as Moving Average (MA), Stochastic Oscillator, MACD, and so on to identify trends, momentum, overbought or oversold conditions, and potential reversal points.
3. Trend Analysis
One of the reasons traders learn technical analysis is to analyze the direction of the market trend. It is crucial to identify the market trend to make predictions about future price movements before making the decision. Trends can be uptrend (bullish), downtrend (bearish), or sideways.
4. Support and Resistance Levels
Support and resistance levels are some of the components in technical analysis that are usually used by traders. The price is likely to move within these levels. If the price is upward, it will find the resistance levels, and if the price is downward, it will find the support levels. Traders use these levels to identify potential entry or exit points either the price makes a breakout or bounces.
5. Chart Patterns
Chart patterns are the formation of a combination of the price that gives a signal of potential reversals or continuation in price trends. Some chart patterns that are usually displayed in the market are head and shoulders, triangles, flags, double top or bottom, rectangles, and so on.
6. Volume Analysis
Volume is the number of buyers and sellers that exist in the market. Changes in trading volume can provide additional confirmation or divergence when analyzing price movements.
Learning and understanding the technical analysis will help you to understand how the market structure and evaluate the forecast for the future. Traders need to study the technical analysis before making any decision in the trading. Some traders only use technical analysis, while others combine it with fundamental analysis to evaluate the condition of the market.