What Is Technical Analysis?

Technical analysis studies the past price and trading volume data, and then forecasts the future price trend. This type of analysis focuses on the composition of charts and formulas to capture major and minor trends and identify buying / selling opportunities by estimating the length of the market cycle. Depending on the time span you choose, you can use either intraday (every 5 minutes, every 15 minutes, every hour) or weekly or monthly technical analysis.

Elements of Technical Analysis

1. Discover Trends

About technical analysis, you may have heard the following maxim: "The Trend Is Your Friend". Finding a dominant trend will help you see the market as a whole and give you more insight - especially when shorter term market volatility would disrupt the market as a whole. Weekly and monthly chart analysis is best used to identify longer-term trends. Once you find the major trend, you can choose the trend in the time span you want to trade. In this way, you can buy and sell during the uptrend and sell during the downtrend.

2. Support and Resistance

Support and resistance levels are points in the chart that are sustained at a predetermined level of price of a security which it is thought that the price will tend to stop and reverse. The support level is usually the lowest point in all chart modes (hourly, weekly or yearly), while the resistance level is the highest point (peak point) in the chart. When these points show a recurring trend, they are identified as supports and resistances. The best time to buy / sell is near the unbreakable level of support / resistance.

Once these levels are broken, they tend to be inverse obstacles. Therefore, in the rising market, the broken resistance level may become the support for the upward trend; however, in the falling market, once the support level is broken, it will become resistance.

3. Trend lines and Channels

Trend line is a simple and practical tool in identifying market trend direction. The upward straight line is formed by connecting at least two consecutive low points. Naturally, the second point must be higher than the first. The extension of the straight line helps to judge the path of the market's movement. Upward trend is a specific method for identifying support lines / levels. In contrast, the downward line is drawn by connecting two or more points. To some extent, the variability of transaction lines is related to the number of connection points.

However, it is worth mentioning that each point does not need to be close.

The channel is defined as an uptrend line parallel to the corresponding downtrend line. Two lines can be thought as corridors with prices up, down or horizontal. The common properties of channels that support trend line connection points should be between the two connection points of their reverse lines.

4. Moving Average

If you believe in the maxim "The Trend Is Your Friend" in technical analysis, the moving average indicator will benefit you a lot. The moving average shows the average price at a specific time in a specific cycle. They are called "moving" because they are measured at the same time and reflect the latest average.
One of the disadvantages of the moving average is that it lags behind the market, so it is not necessarily a sign of trend change. In order to solve this problem, using a shorter moving average of 5 or 10 days will better reflect the recent price trend than a moving average of 40 or 200 days.

Alternatively, the moving average can also be used by combining two different time span averages. Whether using a moving average of 5 and 20 days, or a moving average of 40 and 200 days, buying signals are usually detected when the shorter term average moves up through the longer term average. In contrast, selling signals are prompted when the shorter term average moves down through the longer term average.

There are three mathematically different moving averages: simple arithmetic moving average; smoothed and weighted moving average; and exponential moving average. The last is the preferred method because it gives more weight to recent data and considers data throughout the life of the financial instrument.