What is technical analysis?
Technical analysis is based on the premise that what happens in the past can be used to
predict what might happen in the future - although of course you have to remember this can
never be guaranteed, which means technical analysis shouldn't be used in isolation.
Technical analysis what traders use to study the historic price movements of markets. And by far
the easiest way to do this is by looking at charts.
By examining the trends and patterns in market prices, technical analysts can interpret the
behaviour of buyers and sellers to help give an indication of where the market could go next. Since
there are certain types of behavioural pattern that have occurred repeatedly in the past, it's
possible to identify them as they emerge and predict the likely future movement of the market.
For example, if the share price of Big Pharmaceutical Company EFG keeps dropping to around
the 100p level and then rising immediately afterwards, a technical analyst might choose to buy
some shares the next time it falls to that price, predicting that the pattern will repeat itself.
Lesson summary
There are two main types of market analysis: technical and fundamental
Technical analysts say what happens in the past can be used to predict what might happen in the future
By studying trends and patterns in market prices, technical analysts forecast which way the market might
move next
, Types of charts
The first thing you'll need to understand as a technical analyst is the different types of charts at
your disposal and their relative benefits.
Charts come in three main forms: line, bar and candlestick. Let's have a look at how each type
works.
Line chart
This is the simplest form of chart - essentially just a number of data points joined by a line. This
type of chart shows the historic price movement of an asset in a very clear and simplistic manner.
Unlike their bar and candlestick cousins, line charts only display the closing price of an asset
over time. So if we look at the daily chart for spot gold, for example, each data point represents the
closing price for gold on that day.
The benefit of using line charts is that they can make patterns easier to spot. However, due to their
simplicity, you can miss some of the important price movements that occur between the open and
close of each data point.
, Bar chart (also called HLOC chart)
More complex than line charts, bar charts show the opening and closing prices as well as the
highs and lows for each period. That's why they are sometimes called HLOC charts, because they
display the High, Low, Open and Close.
The very top of each bar represents the highest price traded during that period, while the bottom
signifies the lowest. The horizontal notch to the left is the opening price, and the notch to the right
is the closing.
Often bar charts are in black and white, but they can also be displayed in colour, as shown on this
five minute chart of the FTSE 100. In this case the red bars represent a five minute period where
the price has dropped, while the green bars represent a five minute period where the price has
risen.
, Candlestick chart
The shape of each candlestick can also give you clues as to the balance between buying and
selling pressure in the market. For example, if a candlestick has a long green body, it shows
there's a lot of buying pressure. If it has a long red body, there's considerable selling pressure.
Fig. This is the candlesticks chart of Reliance ind.
Technical analysis is based on the premise that what happens in the past can be used to
predict what might happen in the future - although of course you have to remember this can
never be guaranteed, which means technical analysis shouldn't be used in isolation.
Technical analysis what traders use to study the historic price movements of markets. And by far
the easiest way to do this is by looking at charts.
By examining the trends and patterns in market prices, technical analysts can interpret the
behaviour of buyers and sellers to help give an indication of where the market could go next. Since
there are certain types of behavioural pattern that have occurred repeatedly in the past, it's
possible to identify them as they emerge and predict the likely future movement of the market.
For example, if the share price of Big Pharmaceutical Company EFG keeps dropping to around
the 100p level and then rising immediately afterwards, a technical analyst might choose to buy
some shares the next time it falls to that price, predicting that the pattern will repeat itself.
Lesson summary
There are two main types of market analysis: technical and fundamental
Technical analysts say what happens in the past can be used to predict what might happen in the future
By studying trends and patterns in market prices, technical analysts forecast which way the market might
move next
, Types of charts
The first thing you'll need to understand as a technical analyst is the different types of charts at
your disposal and their relative benefits.
Charts come in three main forms: line, bar and candlestick. Let's have a look at how each type
works.
Line chart
This is the simplest form of chart - essentially just a number of data points joined by a line. This
type of chart shows the historic price movement of an asset in a very clear and simplistic manner.
Unlike their bar and candlestick cousins, line charts only display the closing price of an asset
over time. So if we look at the daily chart for spot gold, for example, each data point represents the
closing price for gold on that day.
The benefit of using line charts is that they can make patterns easier to spot. However, due to their
simplicity, you can miss some of the important price movements that occur between the open and
close of each data point.
, Bar chart (also called HLOC chart)
More complex than line charts, bar charts show the opening and closing prices as well as the
highs and lows for each period. That's why they are sometimes called HLOC charts, because they
display the High, Low, Open and Close.
The very top of each bar represents the highest price traded during that period, while the bottom
signifies the lowest. The horizontal notch to the left is the opening price, and the notch to the right
is the closing.
Often bar charts are in black and white, but they can also be displayed in colour, as shown on this
five minute chart of the FTSE 100. In this case the red bars represent a five minute period where
the price has dropped, while the green bars represent a five minute period where the price has
risen.
, Candlestick chart
The shape of each candlestick can also give you clues as to the balance between buying and
selling pressure in the market. For example, if a candlestick has a long green body, it shows
there's a lot of buying pressure. If it has a long red body, there's considerable selling pressure.
Fig. This is the candlesticks chart of Reliance ind.
