What Is Technical Analysis

Risk Management • 3 min read • Beginner

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Financial markets can feel like a vast ocean, and to navigate them successfully, you need a map. Investors and traders use two main types of maps: fundamental analysis and technical analysis.

Fundamental analysis is like being a company inspector. You dig deep into a company's financial health to figure out its "true value." You would look at things like profits, sales, and debt, or for a currency, you'd examine a country's economic indicators like GDP and inflation. The goal is to find out if the asset is currently a good deal based on its underlying quality.

Technical analysis is different. It's more like a weather forecaster studying cloud patterns and wind currents. You don't care what's happening inside the company or country; you only care about the visual signals on a price chart. Technical analysts believe the market's "weather" (price and volume) tells you everything you need to know.

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The Beliefs of a Technical Analyst

Technical analysis rests on three core beliefs that are easy to understand:

1. The market reflects everything. This is the big one. Technical analysts believe that all relevant information—whether it's an earnings report, a political scandal, or a new product launch—is already "baked in" to the asset's price. The price on the chart is the final, true verdict of the market.

2. Prices move in trends. Think of a river. Once it starts flowing in a certain direction, it tends to keep going that way. Markets are similar. When a stock or currency pair starts an upward or downward trend, it's more likely to continue than to suddenly change course. The key is to ride the trend.

3. History repeats itself. Why do these trends and patterns happen? Because human psychology doesn't change much. Traders and investors react to similar situations in predictable ways. This creates recurring patterns on charts that technical analysts can recognize and use to predict future movements.

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Tools of the Trade

So, what does a technical analyst actually do? They use a toolkit of indicators and drawing tools to find patterns and trends on a chart.

Chart Patterns: These are specific shapes that appear on a chart, such as a "double top" or "head and shoulders," that can signal a potential reversal in the trend.

Indicators: These are mathematical calculations that analyze price and volume data. The Relative Strength Index (RSI), for example, is like a battery meter for an asset, showing if it's "overbought" (running on fumes and due for a drop) or "oversold" (out of juice and due for a rise).

  • Support and Resistance: Imagine a price chart as a ball bouncing between a floor and a ceiling. Support is the floor where the price tends to stop falling because buyers step in. Resistance is the ceiling where the price tends to stop rising because sellers emerge.

In a nutshell, technical analysis is about using a chart as a roadmap to understand market psychology and predict future price movements. It's the most common tool for traders focused on timing their entries and exits, whether they're trading stocks, commodities, or currencies on the Forex market.

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Introduction to Technical Analysis
Section Tests
Chart Patterns & Price Action
Risk Management
Platform Interface
Understanding Signals
Practical Usage
Module Tests
Learning Tips
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  • Practice with examples
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