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Technical Analysis – A Beginner’s Guide

by 25. Apr 2023 @ 10:51Educational

Technical traders believe that current or past price action in the market is the most reliable indicator of future price action.

What is Technical Analysis?

Technical analysis is a method of predicting the movement of stock prices by analyzing historical price charts.

Two important things in technical analysis are the time frame of the chart and the indicators used.

Charts can show different time frames, from as short as one minute to as long as a year.

Popular time frames that technical analysts most frequently examine include:

  • 5-minute chart
  • 15-minute chart
  • Hourly chart
  • 4-hour chart
  • Daily chart
  • Weekly Chart

The time frame a trader selects is usually based on their trading style. Traders who buy and sell stocks within a day prefer shorter time frames like the 5-minute or 15-minute charts, while traders who hold stocks for longer periods tend to analyze longer time frames like the hourly, 4-hour, daily, or weekly charts.

 

Why are Technical Indicators relevant?

Technical indicators can be self-fulfilling because they are widely used by traders and investors to make trading decisions. As a result, when a particular technical indicator shows a buy or sell signal, many traders may act on that signal, thereby causing the price to move in the predicted direction.

For example, if a popular technical indicator like the moving average shows a bullish crossover, indicating that the short-term moving average has crossed above the long-term moving average, many traders may interpret this as a buy signal and start buying the asset. This increased buying activity can cause the price to rise, thus validating the initial buy signal.

With the rise of AI and trading bots, technical indicators have become even more significant, as these programs often rely heavily on technical analysis to make trading decisions.

In essence, the self-fulfilling nature of technical indicators is a result of their widespread use and the fact that many traders and investors make trading decisions based on them. However, it is important to note that technical indicators are not infallible and should be used in conjunction with other forms of analysis to make well-informed trading decisions.

Recommended next: How to read stock charts like a Pro

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