Technical analysis is a series of analysis methodologies for predicting the price direction of the markets by studying charts and by using markets statistics. These methodologies provide buy and sell decisions.
Technical analysts use mostly two categories of methodologies: technical indicators and price action. Technical indicators are mathematical formulas that contain past data (price, volume etc). Price action refers to the research of the current price regarding past prices and to the research of some patterns on a chart that statistically may produce buy or sell signals.
There are many technical indicators in technical analysis. As a matter of fact, everybody can design a technical indicator, all we need is knowledge of the market and its aspects (price, volume, volatility etc), fantasy and a good programmer that can implement our idea. Technical analysis does not require very high level in mathematics. Of course, some very deep knowers of the markets have created really useful technical indicators that are quite famous and efficient such as Relative Strength Index (RSI), MACD, Bollinger Bands, Commodity Channel Index (CCI), Average Directional Moving Index (ADX) etc
Same happens with price action, although price action is supposed to be more instant since decisions are derived from actual prices instead of lagging indicators.
There are thousands of books, articles, organizations, sites, coaches, market gurus that can help us with technical analysis. Studying always makes us better but we need to answer to a very critical question: what we can and we can’t do with technical analysis?
These questions have always difficult and ambiguous answers. There’s something that we can claim for sure though: We can’t predict the markets. Markets time series are very complex and full of noise. Million factors every single time all over the world may influence the price of a currency pair, a stock or a future and there’s no secure method to predict the price, even with superior techniques and methodologies such as Machine Learning and Artificial Intelligence.
There are many things that we can do with technical analysis though:
- We can indicate the markets trend
- We can indicate the strength of a trend
- We can indicate the market momentum (the rate of the price change)
- We can indicate if a market is overbought or oversold
- We can find market’s supports and resistances
- We can find price chart patterns
- We can indicate market volumes and volatility
The above list is endless but always keep in mind that all these methodologies and indications can only assist us. For example, we can define entry and exit points, we can filter our strategy etc etc
Some traders spend hours, days, months and years by keep looking for an indicator that will make money constantly…an indicator that will be profitable for ever. There’s no such indicator. All indicators may perform good for a certain period of time but no indicator performs good forever. In other words, there’s no holy grail in trading.
There are specific techniques and algorithms that define what is the best period for each indicator, for specific time-frames and specific instruments. These algorithms have the assistance of Machine Learning and Artificial Intelligence in order to define which indicator is most appropriate on which time-frame on which instrument.