Banks use technical analysis

Beginner's Guide to Technical Analysis

Understand technical analysis

There are a number of ways that traders can perform technical analysis. Most of them, however, focus on using historical price charts that are analyzed with the help of technical indicators or oscillators. The goal of technical analysis is to identify recognizable patterns that will help traders find the right time and price level to enter and exit the market.

Technical analysis charts usually show price movements in the form of candles that illustrate the key points of a market price over a period of time:

  • The color of the candle indicates whether the price has moved up (green) or down (red)
  • The bars show the opening and closing prices
  • The wicks indicate the highest and lowest price levels

Learn which 16 candle chart patterns every trader should know

Technical analysts use many different indicators in their charts. The best known technical analysis strategies use moving averages, Fibonacci retracements and Bollinger bands to identify price levels for entry and exit. However, the indicators used vary from analyst to analyst and are dependent on the respective trading style, the market in which it is traded and the period under consideration.

Often times, technical analysts test how their strategy would work before actually risking real capital. To test your strategy, apply it to previous price movements in the market. This process is also called "backtest". The point is to take a variety of data from a number of selected markets and apply a strategy to it. When the backtest works, traders and analysts develop confidence to use technical analysis as the basis for opening live positions.

In fact, some traders have so much confidence in the performance of their strategy that they choose to automate their strategy. Automating a technical analysis strategy involves setting up a set of algorithms that can execute trading operations with minimal human involvement.