Technical analysis is one of the most popular tools used by traders to determine when to open or close a position. Recap the most important aspects of the technical analysis course and refresh your understanding of charting, patterns and technical indicators, as well as risk and trade management.
What is technical analysis?
Technical analysis involves utilizing historical data to predict the probability of a future price move. Various metrics, such as price data and trade volumes, are typically used to make these predictions.
Price charts are used by technical analysts to analyze how a price has moved in the past, and to try and determine which direction it might move in the future. There are a range of different chart types available, including:
- Line charts
- Bar charts
- Candlestick charts
- Point & figure charts
What are technical analysis patterns?
Technical analysts look out for chart patterns, which are shapes that form as price data is recorded on a price chart. These patterns can potentially indicate which direction price might move in the future.
- Uptrend — formed when price action makes higher highs and higher lows
- Downtrend — formed when price action makes lower highs and lower lows
Some technical analysts keep an eye out for specific candlestick patterns that might suggest which way an asset’s price will move.
What are technical indicators?
Technical indicators are trading tools that use mathematical and statistical formulas to analyze historical price chart data and provide traders with a view of current market conditions.
For example, a moving average will calculate the mean value of an asset’s price over a given period of time. Alternatively, an oscillator will establish the extent to which an asset’s current price is trading within its “normal” range.
With regards to a trading strategy, technical indicators — and general technical analysis — can be used to point out the probable direction of an asset’s price. Remember, however, do not use only indicators to confirm your natural bias!
Risk management
Technical analysis indicators can analyze historical market data to identify points at which traders should exit a position. This could be the point at which price rebounds, enabling traders to recoup some of their losses, or the point at which the strategy is considered to have “failed.”
Some of the most widely used risk management tools or techniques include:
- Stop-losses
- Position sizing
- Risk-reward ratio
Trade management
Technical analysis can also be used to gauge the market once a trade has been opened. Depending on support and resistance levels, among other factors, technical analysis can help a trader to determine the level at which they want to adjust a position, perhaps through buying or selling, or setting a stop-loss or take-profit order.
There are a range of technical analysis factors that can impact a trading strategy. For example, price charts can offer insights into the current conditions of any market, potentially providing an indication of how the situation is due to change over time.
When trading, it is important to find a market that suits your risk tolerance in terms of price volatility and risk-reward potential.
The trade process
Technical analysis forms part of the trade process, which usually looks like the following:
- Fundamental analysis
- Technical analysis
- Management
- Review
Once you have confidence in the direction that an asset’s price might be heading, technical analysis can be used to optimize trade entry and exit points, while price patterns and charting can help to track your position’s progress.
Now that you have completed the technical analysis course, consider taking another look at some of the course materials, testing your knowledge or starting to trade using technical analysis on eToro.
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