Technical Analysis Definition: Trading Terminology For Beginners

Technical analysis is a type of financial analysis that uses patterns in market data to identify supply and demand to identify trends and make future price predictions. It is the most common type of analysis used by active traders, as it can be extremely useful for timing market moves. In other words, to figure out how to buy and sell a financial asset in order to make a profit. It is the foundation of the majority of short term trading strategies. 

Why Use Technical Analysis

Technical analysis is a tool that has proven to be useful in a variety of financial assets to predict future price movement. There are traders in stocks, futures, options, cryptocurrencies, and forex who use technical analysis to base their investments decisions. Successful trading requires one to be able to time markets to catch a strong trend. Technical analysis is an important tool for active traders. Many traders use technical analysis as a way to catalog market data and establish a system to pick entries, exits, and manage risk. Technical analysis shows you high probability areas where a stock’s trend will begin and end. It is very useful for predicting short term trends in the market.  

Technical vs Fundamental Analysis

Fundamental analysis is a way of evaluating a company based on key financial metrics to see if it is currently overvalued or undervalued. It is the most common type of analysis in mainstream finance.  Fundamental analysis, however, does not provide any indications of when this expected valuation will be priced into the stock, or for how long. The analysis is more relevant to the long term fate of the company. For momentum traders, fundamental analysis does not much provide much value for direct buy and sell signals. It is useful for picking your bias and conviction on a stock, but it can be difficult to use for timing markets in the short term. This is the primary reason why technical analysis is combined with fundamental analysis by most professional traders. Day traders and swing traders tend to give more weight to technical than fundamental.

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