What is technical analysis & how to use it

Why use technical analysis?

Broadly speaking, there are basically two techniques to market analysis or ways to analyse an asset and make predictions about its future price movements. One is technical analysis and the other is fundamental analysis. When using fundamental analysis to identify trading opportunities, a trader focuses on the asset’s “true value” or the most justified price of the asset. For this, the trader needs to study all the forces that influence the price of the asset, whether intrinsic or external, to determine whether the current price is higher or lower than the price at which the asset should ideally be selling. These influencing factors include both intrinsic and external factors and may be very different for different asset classes.

On the other hand, technical analysis strips all the noise and allows traders to focus only on historical price movements. Moreover, technical analysis techniques remain the same across asset classes.

Top Tip

Even when using technical analysis, it’s good to know which factors affect the price of the instrument you’re trading, as this will allow you to look at how the market typically moves during such events.

How to use technical analysis?

 
Here are the initial steps to begin trading with technical analysis:
 

Step 1: Identify the chart type

 
While line and bar charts are available on trading platforms, the most popular is candlestick charting. This is because candlesticks give traders the most important information at a glance. The highest point of a candlestick indicates the highest price at which the instrument is traded during the chosen timeframe, while the candlestick’s lowest point indicates the lowest price. The body of the candlestick shows the opening and closing prices, while the colour indicates whether the price movement was upward or downward.
 
 

 
 

Top Tip

Price charts are available in different timeframes. Traders typically choose 1-minute, 5-minute, 15-minute or hourly charts, while long-term investors study 4-hour, daily or monthly charts.

Step 2: Choose the best technical indicators

Technical indicators play a key role in identifying an ongoing trend in the pricing chart as well as in determining whether the trend is likely to continue or reverse. While the choices are practically endless, moving averages are considered the best technical indicators for beginners, which makes them the most widely used option. Apart from simple and exponential moving averages (EMA), the other popular indicators are Stochastic Oscillators, Bollinger Bands, Ichimoku cloud, and Fibonacci retracement.

Most traders use two or three of these best technical indicators to make sense of price charts. Many traders combine trend indicators with momentum indicators like RSI. Combining trendlines with volume indicators will help you determine the potential entry and exit prices for an asset.

Top Tip

Use a demo account to try out different technical indicators to choose your best ones and formulate your trading strategy.

Step 3: Identify support and resistance levels

Support and resistance levels form a range within which prices tend to move. In a bear market, the support level is a price at which the asset price stops falling. In a bull market, the resistance level is a price at which the asset price stops rising. It’s important to know the support and resistance levels as price movements are most likely to reverse at these price points. Technical indicators can be used to determine support and resistance levels.

  Put your skills to work. Start trading now>>

Top Tip

If the price breaks through a support or resistance level, it tends to continue in that direction for a while.

After you have determined the market trend and identified exit and entry points, it’s also important to decide on position sizing or the amount of money you will open the trade with. This will depend on your financial goals and risk appetite.

Learn the Terms

Market trend: This refers to the tendency of an asset to move in a particular direction.

RSI: Relative Strength Index is a momentum indicator that measures the magnitude of price changes to help traders determine whether the asset is overbought or oversold.

Bollinger bands: These are technical tools that chart out prices and volatility of an asset over a period of time. They create an envelope of upper and lower price range levels.

Disclaimer: Our content is intended to be used for informational purposes only. It is very important to do your own research before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on this article and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Klips does not put available shares or any other underlying asset, but CFD derivatives based in underlying assets.