Technical analysis is one of the two chief ways to analyze a stock or another trading asset. In addition to fundamental analysis, a technical assessment of a company allows you to draw a bigger picture of how the current market price can change in the near future, as well as estimate the target’s current financial well-being.
Technical analysis deals with the historic data and technical parameters of a selected stock. It includes short-term volatility, volume, liquidity, etc. The estimations are conducted and organized into a digestible form using a variety of technical indicators. The technical analysis gave way to a large number of trading strategies, as well.
What are indicators?
Indicators are visual elements (oscillators) that change and adjust based on technical logic, such as price, liquidity, volatility, and more. They have different appearances and purposes, but you can typically use them to understand what the next best move is on the market. As such, they are typically utilized for trend-based trading.
- MOVING AVERAGE (MA)
The most basic indicator and the main staple of any technical strategy, a moving average is an indicator that essentially shows the average price of a particular asset in a specified timeframe. On its own, a MA indicator has limited usefulness, but it’s often included in elaborate indicator packages.
- RELATIVE STRENGTH INDEX (RSI)
RSI is one of those more elaborate oscillators. It’s typically displayed below the graph and shows roughly how oversold or undersold a stock is. The indicator does it by analyzing the recent price changes. In turn, it helps traders confirm if the stock enters a bullish or a bearish trend.
- BOLLINGER BANDS
Bollinger Bands are displayed on either side of a graph. They envelop the candles, tightening and expanding all the time. Their purpose is to locate the perfect entry and exit points in the market by estimating the recent, sudden price changes based on volatility and MA data.
Technical trading strategies
The three indicators above are the most common oscillators used for technical analysis. They can help people confirm the potential decision on the market and are employed in close conjunction with the various technical trading strategies. Below are, basically, strategies that use technical tools like these.
- TREND-FOCUSED STRATEGY
This strategy uses indicators, as well as other signs (such as trend patterns) to determine when a trend is about to start or end. The assumption is that the market follows a set number of patterns, repeated at unknown intervals depending on the behavior of market participants. This strategy aims to follow such patterns to gain profit.
- RANGE TRADING
Range trading instead works by analyzing the lowest and highest price points currently possible in the given market. The resistance and support levels can be drawn as simple lines using a number of oscillators and other instruments, which give traders an area in which they can operate and gain money by buying low and selling high.
- MOMENTUM TRADING
Another common trading approach is based on momentum. The markets commonly retain a certain degree of predictability. If a certain trend has just started, it’s likely to continue this way for some time, provided the technical indicators, parameters, and other data support the claim.
Summary
Technical analysis is more than just these indicators and strategies. In fact, you can create your own approach to trading using these and similar solutions in various combinations. To learn how, you can try the free online trading courses that we offer or simply use the trial-and-error method.
