Technical analysis definition

Examples of technical analysis tools

Technical analysts have a wide range of tools that they can use to find trends and patterns on charts. These include moving averages, support and resistance levels, Bollinger bands, and more. All of the tools have the same purpose: to make understanding chart movements and identifying trends easier for technical traders.

Pros and cons of technical analysis

Pros of technical analysis

Being able to identify the signals for price trends in a market is a key component of any trading strategy. All traders need to work out a methodology for locating the best entry and exit points in a market, and using technical analysis tools is a very popular way of doing so.

In fact, technical analysis tools are so commonly used, that many believe they have created self-fulfilling trading rules: As more and more traders use the same indicators to find support and resistance levels, there will be more buyers and sellers congregated around the same price points, and the patterns will inevitably be repeated.

Cons of technical analysis

There will always be an element of market behaviour that is unpredictable. There is no definitive guarantee that any form of analysis – technical or fundamental – will be 100% accurate. Although historical price patterns give us an insight into an asset’s likely price trajectory, that is no promise of success.

Traders should use a range of indicators and analysis tools to get the highest level of assurance possible, and have a risk management strategy in place to protect against adverse movements.