At its most basic Technical Analysis (TA) attempts to describe the psychological state of the market. This is most often defined as by putting the markets into ‘trends’. The basic technical analysis tenet is that ‘a trend is in place, until it is broken.’ mirroring the basic Newtonian laws of motion.
TA in various forms has been around for thousands of years. In fact ever since humans have traded commodities, such as wheat in ancient Egypt, there have been those who have attempted to gain an advantage by analysing the historical price data.
General TA theory became more widely adopted in America at the turn of the last century. With Dow Theory, and then Elliott Wave Theory, gaining much precedence. Indeed Dow Theory has become the widely regarded as the starting point for much of the TA industry today.
With the advent of computer power, the sophistication of indicators have become increasingly complex, often to the detriment of the basic premise that TA is a tool for greater understanding of the market psychology behind the price behaviour.
Those coming fresh to Technical Analysis may assume that as it is a predominately mathematical exercise there must be a ‘correct’ way to practise the art. Unfortunately TA is an art, not a science, and there is no right way, only the best way for you.
We tend to believe that Technical Analysis is rather like dieting. If you go into any major book store you can find dozens, if not hundreds of books on how to lose weight. Which seems like rather a waste of paper as all of the diet books ever written can be summarised as, ‘Eat less and exercise more.’
Similarly with Technical Analysis there are numerous books in the market place, and while they may give interesting details on various approaches, they all essentially say the same thing, ‘The trend is your friend.’ They just have various way of getting there.
The reason why there are so many diet books, and so many different Technical Analysis books, is that they all work for the different psychological approaches of the readers.
As a result those starting to look at Technical Analysis need to understand the general basics of the techniques, and then take it on from there according to their own interests. There is no ‘the right’ way to conduct Technical Analysis, only the ‘best way for you’.
We also feel it is important to note that some commentators suggest that there is a ‘Technical Approach’ or a ‘Fundamental approach’. Suggesting that this is a binary state, where you have to choose one or the other. It is very important to understand that Technical Analysis is the study of Fundamental Analysis, it is just that TA reflects the effect of Fundamental Analysis rather than directly studying Fundamental data itself. Most technicians believe that fundamentals drive the markets. It is just that they believe you can gain as much information, if not more, by focusing on the price action, rather than the underlying data.
In other words:- Fundamental Analysis + Market Sentiment = Price Action, and Technical Analysis is the study of price action.
This viewpoint has been backed up academics who have proven that the global markets are in general terms ‘efficient’. Meaning that all publicly available information is quickly and efficiently reflected in the price. Suggesting that the study of the fundamental data does not bring above average gains by itself, as all the data used is available to everyone else in the marketplace and quickly reflected in the market price. So a study of the price action is a more efficient use of resources for the average investor.
We will leave the detail on the increasingly complex mathematical indicators to the plethora of TA titles available online and instead urge a focus on the basics. As we do believe that everyone practicing any form of TA needs to understand these basics. Once these underlying principles are understood then investors will be better placed to study the right TA path for them.
So for those coming to Technical Analysis we would strongly recommend getting a grasp on the basic ‘Trend is your friend’ concept, by looking at just a few of the more commonplace Technical Indicators and patterns, and becoming comfortable with these. Then over time traders will have the basic knowledge and understanding to be able to comprehend the more mathematical and analytical side of Technical Analysis.
The basics for us are :- Trend Lines, Moving Averages, RSI and Fibonacci Retracement levels. These methods will make up 95% of Trading.co.uk Technical Analysis reports. With just a basic understanding of this handful of tools we feel traders will gain a better understanding on the market movements.
Any news, opinions, research, analysis, prices or other information contained on the trading.co.uk website are provided as general Market commentary and do not constitute investment advice. Trading.co.uk is not liable for any loss or damage, including without limitation, any loss of profit which may arise directly or indirectly from use of or reliance on such information.