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Basics of Technical Analysis

Basics of Technical Analysis

 

Technical analysis uses charts and other tools to identify patterns that can imply future activity. It doesn’t attempt to calculate an assets intrinsic value. Understanding the basics of technical analysis can help investors predict the future price movements of assets.

Some technical analysts use technical oscillators and indicators while others rely on chart patterns; however, most use a combination of the two styles. What separates technical analysts from their fundamental counterparts is the fact that technical analysts use historical price and volume data, and they don’t care whether an asset is undervalued or overvalued.

Despite all the fancy tools used, technical analysis simply studies demand and supply in a market to determine the future direction and trend. Analysts attempt to identify market sentiment by analyzing the markets price movements. Technical analysis follows three assumptions:

  • History tends to repeat itself
  • Prices follow trends
  • The market discounts everything

Technical analysts use four types of charts depending on their individual skills and the information they are seeking. Charts are, perhaps, the most fundamental features of technical analysis. It’s important to understand the information provided in charts. These chart types are:

  • Point and figure chart
  • Candlestick chart
  • Bar chart
  • Line chart

Technical analysts believe the market is 80% psychological and 20% logical, while fundamentalists believe the opposite. Logical or psychological may be up for debate; however, no one can question the current price of an asset, though they can debate the future movement.

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