Trading the Markets: Introduction to Technical Analysis
So what exactly is Technical Analysis? In simple words, it is a method of study used to find patterns or trends on price charts in order to identify trading opportunities. It applies to most asset classes that have data w.r.t. time, which means we can use it for commodities, currencies, stocks, cryptocurrencies, etc.
When using technical analysis, it is important to note that we are more interested in the “how” than the “why” of the movement. Basically, the reason for any kind of movement is not very important, we just want to be able to get in before the movement happens and profit from it.
Another thing that is important to remember is that in the markets history tends to repeat itself. If it doesn’t repeat, it most certainly rhymes. This happens because any market essentially reflects how all its participants feel about and react to price and trend changes. Participants as a whole tend to react consistently to any particular type of movement every time it happens. For example, when there is pessimism in a market, due to fear of losing money, people start selling their assets at whatever price they can, even when they know it is only a matter of time (could be days, could be months, but the point stands) before the price rebounds. And this happens every time there is heavy selling in the market.
Now that we know what technical analysis is, let’s just understand how to read the price movements during the day. A basic jargon you can remember is OHLC.
O - Open Price: Trading starts at this price/First trade occurs at this price
H - High Price: The highest price at which the asset traded for the day
L - Low Price: The lowest price at which the asset traded for the day
C - Close Price: Trading closes at this price/ Last trade occurs at this price. This is the most important data point since it shows the strength, weakness or confusion during the day. We’ll cover this in detail in later articles.
Keep in mind, if C > O, we had a positive day and if C < O, we had a negative day.
This article might not seem very information heavy but it is important for you to grasp that markets are not random, in that luck does not play such a big part as we might have heard from some distant relative. You can predict price movements using a number of tools and profit using them. And I’ll talk about these tools used in technical analysis in the later parts of this series. The first one is charts, read about them here.
Subscribe for free to receive new posts and support my work. And do let me know if you want a specific topic covered!
P.S. You can read all my articles here.