Introduction to Technical Analysis

Technical analysis is an approach used in an attempt to understand what is happening in the market, create theories about what may happen in the future, and establish trade structures.

It is comprised of a spectrum of indicators, some of which are perceived as being fairly reliable while others border on conspiracy theories in terms of reliability. Given the breadth of activities that fall under technical analysis, this topic will be spread over many posts, each focusing on a specific aspect.

Technical Analysis can be defined as the study of past market action to help predict future market direction. Market action consists of price, volume, and open interest. Technical analysis is applicable in all liquid markets and on all timeframes, although as we will see - some timeframes are better suited to it than others.

Indicators are split into two categories, hinting at their strength and reliability. We'll get into what these mean in practice shortly.

Primary Indicators:

• Supports / Resistance / Trendlines

• Price Patterns

• Retracements and Extensions

• Candlesticks

Secondary Indicators:

• Derivatives of price

• Volume

There are three core tenants of Technical Analysis:

1. Market action discounts everything - Anything that can affect the price is already reflected within the current price.

2. Prices move in trends and trends persist (until they don't).

3. History repeats itself and chart patterns illustrate market psychology.

Some will take Technical Analysis methodologies to their extreme through the use of autonomous trading systems which automatically execute trades when certain conditions are hit but for now lets stick with the basics.