Technical Analysis Explained

What is technical analysis? It is a term often misunderstood by many. I have heard arguments that go as far as calling technical analysis as a mystical art which compares to tea leaf reading. Nothing annoys me more, honestly then when I see the two being compared side by side.

With that said, let me explain in a very simple way what Technical Analysis really is. In its very simple definition Technical Analysis is the study of the security’s past price and volume performance in an attempt to predict the future performance. Technical analysis ignores all the fundamental information such as earnings, revenue growth etc., and puts a great deal of importance in price elements such as open, high, low and close, and volume.

If you are wondering why you should use technical analysis, let me explain in a bit more detail. Technical analysis, when used correctly, can dramatically increase your returns while minimizing risks.

According to wikipedia Technical analysis were derived from observation of financial markets over hundreds of years. The oldest form or a branch of technical analysis, and now one of the most widely used form of technical analysis is Candlestick charting. It is also believed that “Honno, the God of the markets,” a very successful rice trader in early Japan, is said to have invented technical analysis.

As far as I am concerned, the most important aspect of technical analysis is that it pays absolutely NO attention as to why the price is moving. It simply looks for trends. Since we know that history repeats itself, chances are great that based on the past performance, similar patterns will appear in the future.

Additionally, please read the Stock Support and Resistance if you want to read more about technical analysis and how to use it successfully.

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