A Brief Guide on Technical Analysis and the Tools You Can Use
Technical analysis is one of the three types of analysis that traders use to make decisions. The other two are fundamental and sentimental analysis. Technical analysis involves the use of technical indicators to make forecasts on how the asset price will move.
This article will look at the types of indicators and how you can succeed as a technician.
→Six Indicators you should learn to Become an excellent Market Technician
The core of trading and investing is to find a trend and follow it to the end. When you find a trend that is moving upwards, the goal is to buy and when you find a trend that is moving downwards, the goal is to sell.
Trend indicators are used to show when a new trend is forming and when it is coming to an end. Examples of trend indicators are:
- Parabolic SAR
- Moving Averages
- Average Directional Index
- Standard Deviation
- Ichimoku Kinko Hyo
Oscillators are indicators that are used to show the extremes of the trends. They are mostly known as indicators of oversold and overbought positions. Examples of these types of indicators are:
Wise traders don’t focus on oscillators and trend indicators alone. Those who focus on these alone often find themselves making the wrong decision. Instead, the ideal process is to incorporate the concept of volumes in the technical analysis.
The volumes show the activity of the other investors in the market. For example, the trend and volumes indicator can reveal a bullish trend but at a low volume environment. If this happens, it could be a false breakout.
If the volume is high, it means that more investors are following the trend. Examples of these indicators are:
- Accumulation and distribution
- Money Flow Index
- On Balance Volume
There are other indicators that are not in either of the classification but ones that help the traders make decisions. These include: Fractals, Heiken Ashi, and iExposure among others.
Apart from these indicators, there are other tools that will help you improve your technical analysis skills. These are known as charting tools because they give you an indication of where the price of an asset will move next. Examples of these are the Fibonacci Retracement, Gann line and grid, and linear regression.
Another important aspect in technical analysis is the candlestick patterns. It is almost impossible to be successful in this analysis if you don’t know how to interpret the candlestick patterns. Examples of the most popular patterns are:
- Three Line Strikes
- Two black gapping
- Three black cows
- Evening and morning stars
- Abandoned baby
- Hammer reversal
All these technical analysis tools were created using complex mathematical formulas but fortunately, you don’t need to calculate them yourselves. Instead, all you need to do is to apply them in the charts provided by DTTW.
In addition, you don’t need to master all the indicators. You just need to master a few and then learn how you can use them in doing the analysis.