You want to learn technical analysis but don't know where to start ? Well, this will hopefully help answer some questions you may have.
Quite simply, technical analysis is a particular method of studying charts in an effort to establish future price movements. It is used to help guide investors/traders buying and selling decisions. It is not a holy grail system, instead a useful addition to your analysis.
A long term chart of Apple Stock with the blue line representing an uptrend. See how price bounces off the blue line. This is a perfect example of technical analysis of a stock.
You can apply technical indicators to any market you wish to trade, stocks, bonds, equities, options, currencies, commodities etc. Different indicators work better in different market cycles as we'll outline below.
Any timeframe within your preferred trading or investing instrument can be studied through the use of technical analysis.
I find that different technical indicators work best in different market environments. An example would be in in an up trending market like the AAPL stock in the chart above, buying dips would have been a great example of technical analysis in action.
In choppy sideways markets, mean reversion technical indicators work better on average
Technical Analysis of Caterpillar
A good example of using technical analysis for mean reversion in sideways markets, i.e. buying support and shorting resistance.
HF technical analysis with price gap due to earnings. This is a great example of how a news announcement can render your technical analysis study less effective. You'd have been stopped out if you had bought the support level where the blue line is.
Recommended reading you might find useful having read this article.
A Top Down Approach
I was going to put this within the 'when technical analysis works best' but it's so important, I feel it deserves a heading all on it's own. Most of the best traders/investors in the world today adopt a top down approach when using technical analysis.
This means that they start by examining the broad market i.e Nasdaq 100, S&P 500 etc and work their way down to the highest probability times to trade for them within their individual stocks/commodities etc.
Here is step 1 example. Examining the broad market on a weekly chart, we can see price traded near its uptrend line in Feb
Here is an example of step 2 of the top down analysis. At the exact time the overall market was trading into its uptrend support as shown above, Apple Stock was also trading into its uptrend support as shown below.
Then this takes us to step 3 which is a higher probability entry price. This can be done by drilling down into a lower timeframe on apple stock e.g hourly, 15 minutes etc to get the best entry for a good risk/reward trade.
This is a great step by step example of the power of technical analysis when applied correctly.
As mentioned above, there are hundreds of different technical indicators out there. Each one works better in different market environments and only when you dig through them can you see what works best for you.
The top 5 most popular indicators are :
No, it is not. It is very important that no one believes that after reading this article, you can just throw up a few indicators and boom, lots of profits. Technical Analysis is a predictive tool. It helps guide us all in the right direction. It is similar to the weather forecast. They are not always right but on average, they can predict when a hurricane is coming.
There are lots of great books where you can learn lots about technical indicators and their best application to the market.
You might also like to read my favorite top 10 best trading books of all time
Hope you found this to be somewhat useful in getting started with technical analysis. If you have any questions, just comment and I'd be happy to answer.