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Looking for a trading strategy? Here's why technical analysis is worth considering…

by , 18 December 2014

In a nutshell, technical analysis is the study of market action using charts to forecast future price trends.

What's great about technical analysis is that once you understand the basics, you can apply your knowledge to any asset. For example, trading shares, currencies and commodities.

So what are the basic principles of technical analysis? And how do they work in practice?

Read on to find out…

The top three principles of technical analysis

#1: Technical analysis works as market prices reflect all knowledge in the market

Technical analysis works on the premise that all information is already priced into the asset in question. In other words, technical analysts believe supply and demand determines the real value of a share or other asset.

Technical analysts focus on what the price of an asset tells them. The price action is the basis of technical analysis.

On the other hand, fundamental analysis looks at a whole host of information that can affect the price of an asset. For example, looking at financial statements of a company and working out if the share is over or undervalued.

If spending hours reading financial statements and other relevant information doesn’t appeal to you, you may be more suited to technical analysis. You’re only interested in the market price.

#2: Technical analysis exploits market trends

Technical analysts believe that prices move in trends and these trends persist over time.

Trading the trend is a great way to make money from the markets. And the old stock market adage, ‘the trend is your friend’ is true as once a trend begins, it’s likely to continue.

#3: Technical analysis looks for repetitive market action

Certain chart patterns appear again and again on charts.

If you find a pattern like this emerging again, there’s a good chance that it will perform as before. This increases your odds of putting on a profitable trade.

So there you have it, why technical analysis is worth considering as a trading strategy.

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Looking for a trading strategy? Here's why technical analysis is worth considering…
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