How Technical Analysis Works

Technical analysis is the process of analyzing and forecasting a financial security or an entire market by examining historical price patterns, volume, and other data. By studying historical patterns of prices – such as peaks, valleys, trends, and cycles – analysts can predict future movements of stocks. Although strategy varies from one analyst to the next, all technical analysts believe that systematic stock movement is primarily driven by human emotions.

How Technical Analysis Works

What is Technical Analysis?

Technical analysis is a methodology for a trader to make decisions about the price of a security based on historical patterns, chart patterns, and indicators. It takes place in two stages: gathering information and analyzing it. Gathering information can take many different forms including reading news reports, researching industry trends and crunching data. After gathering the information, it’s analyzed using charts that are often used to determine the trends in stock prices, bond prices or commodities over time.

How Technical Analysis Works

Technical analysis is a form of technical trading in which people, by looking at charts of past price movements, predict where a security’s price may be headed.

Technical Analysis is the process of analyzing a stock to predict its future price movements. The three main types of stocks to analyze in Technical Analysis are Liquid, Hybrids and Illiquid.

Some types of stocks to analyze in a Technical Analysis are penny stocks, nano-cap stocks, micro-cap stocks, small caps and growth stocks. Penny stocks are considered low risk investments because they have very low market capitalization. They are also traded by many investors that don’t want the headache of managing their own individual portfolio. Nano-cap stocks are smaller than micro-cap stocks but larger than penny stocks. Micro-cap has the smallest market capitalization and many investors consider them too risky for long term investments. Small cap companies have a market capitalization between $50 million and $1 billion dollars. Growth stock firms have claims about increasing earnings for both the next fiscal year and over the course of several years.

Differing Types of Technical Analysis

There are four primary types of technical indicators: moving averages, Bollinger bands, Keltner channels, and oscillators.

Moving averages help predict where a stock is going to be in the future. The stock will typically reach an equilibrium point between the two moving averages. If it does that correctly, then the stock should trend up or down for an extended period of time.

The moving average is a mathematical calculation used to smooth out the price data for a security. The calculation is done by taking a snapshot of the price every n number of periods and then calculating the average of all the prices within that period. It is also called the “simple moving” average because, unlike many similar calculations, it doesn’t use any other inputs like volume or market capitalization.

The Simple moving average is most often used in the context of technical analysis. It is calculated by averaging the closing price for a given period of time and then dividing that number by the total number of periods so far.

Exponential Moving Average, EMA, is a mathematical calculation which averages the data when it is changing. It covers a more recent window of prices than the simple moving average (SMA). The difference in between these two indices is that the EMA’s window size increases exponentially. An exponential moving average takes into account more recent data and consequently provides better accuracy.

A Bollinger band is a range of prices where high volatility levels are expected; this means that there is a high chance that the price will move quickly within a certain area.

Bollinger Bands are created by Bill Bollinger and is effective for differentiating between overbought and oversold markets. It creates two bands, one above the other, where the top band is intended to be increasing in value and the bottom band to be decreasing. This indicator is particularly useful during periods of volatility because it provides an additional tool for traders and investors who need reliable signals.

Chaikin Money Flow (CMF) is a technical indicator that calculates the difference in open, high, low and close of the NYSE composite index. The CMF is generally considered to be a buy/sell signal as it can identify times when the market has gone from bullish to bearish or vice-versa.

Keltners channel is basically a range of prices with low volatility levels; this means the price will tend to stay within the range.

Oscillators are not as common as the other three indicators .

Popular Tools in Use

Technical analysis is a discipline in the field of finance that studies historical price patterns to predict future price movements. The goal of technical analysts is to identify changes in trend and invest before the change takes place. Popular tools used for this include indicators, software, and charting.

The trend following indicator is a popular technical analysis tool that can be set and monitored to automatically turn on when a certain price level of a specific instrument is reached. The trend following indicator automatically turns off if the price level falls below the specified threshold, which helps to save time from having to enter the market on your own.

Technical analysis tools tend to work best in the short-term and focus on a variety of metrics from price charts, volume trends, sentiment, etc. A popular tool is called ‘Charts and Graphs’ which has a quick summary of most popular technical analysis tools with their pros and cons.


Technical analysis is a market tool that allows traders to analyze the behavior of financial markets. It may be used in any market segment, whether it’s stocks or futures. Technical analysis is based on measurable factors such as price and volume.

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