Most traders use technical analysis to get a "big picture" on an investment's price history. Even fundamental traders will glance at a chart to see if they're buying at a fair price, selling at a cyclical top or entering a choppy, sideways market.
Technical analysts make a few key assumptions:
- All market fundamentals are reflected in price data. Moods, differing opinions, and other market fundamentals need not be studied.
- History repeats itself in regular, fairly predictable patterns. These patterns, generated by price movements, are called signals. A technical analyst's goal is to uncover a current market's signals by examining past market signals.
- Prices move in trends. Technical analysts believe price fluctuations are not random and unpredictable. Once an up, down or sideways trend has been established, it usually will continue for a period.
Numerous types of technical indicator intended to help you in predicting market trend:
- Moving Averages (MA): Indicators used to smooth price fluctuations and identify trends. The most basic type of moving average, the simple moving average, is the average of the past x bars ending with the current bar.
- Moving Average Convergence Divergence (MACD): Indicator that utilizes moving averages to identify possible trends and an oscillator to determine when a trend is overbought or oversold.
- Bollinger Bands: Bands that are placed x moving average standard deviations above and below a simple MA line.
- Fibonacci Retracement Levels: Indicator used to identify potential levels of support and resistance.
- Directional Movement Index (DMI): A positive line (+DI) measuring buying and a negative line (-DI) measuring selling pressure.
- Relative Strength Index (RSI): Momentum oscillator that is plotted on a vertical scale from 0 to 100.
- Stochastics: Momentum oscillator that measure momentum by comparing the recent close to the absolute price range (high of the range minus the low of the range) over a period of x bars.
- Trendlines: Straight line on a chart that connects consecutive tops or consecutive bottoms of prices and is utilized to identify levels of support and resistance.
- And many many more ...
