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Technical Analysis Questions and Answers (Q&A)

What is Technical Analysis?

Technical Analysis is used to evaluate trading opportunities using the study of past market action to predict the direction of investments and are based on three premises:

  1. Market action discounts the known fundamentals
  2. Prices move in trends
  3. History repeats itself

What is Technical Analysis helpful for?

Helps identify trends and where price action is in relation to that trend, Useful in money management helping to identify stops and price targets, Enables the analyst to cover many markets in a short space of time, and you do not necessarily have to be an expert in that market to analyse it to some degree, Helps you understand the nature of human behaviour by looking at price action, studying emotions of fear and greed and hope become apparent.

What else is Technical Analysis useful for?

Helps understand the supply/demand situation of a particular instrument, Gives you a weapon against economists and rational thinking, Helps you to use this in conjunction with a fundamental view.

What is the relationship between Fibonacci Numbers and Ratios for Technical Analysis?

800 years ago a brilliant mathematician named Leonardo of Pisa, he introduced the Arabic numbering system we use today 1, 2, 3, 4, 5, 6, 7, 8, 9 and also the idea of fractions 5 ½ and the decimal point and the square root symbol. He wrote 5 books the most famous “Liber Abacci”. He also introduced the numbering system as follows 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 etc and the discovery of certain natural ration relationships.

Why use Fibonacci Numbers in Technical Analysis?

Technical Analysts measure the distances of moves from low to high, or high to low, and ratios of that distance to determine targets and support and resistance points in the future.

0.236%, 0.382%, 0.50%, 0.618% & 0.764% are the common ratios used - these ratios are also used in Gann and Elliott Wave analysis. Remember, using just one technique is not as reliable as multiple techniques to give confidence to trade i.e. rule of multiple techniques. If there are various techniques pointing to similar numbers then these are important.

What are the conventional visual chart patterns in Technical Analysis?

These are the most commonly found in western technical analysis techniques

  • Reversal Patterns
  • Continuation Patterns
  • Channels

These patterns all have measuring implications and targets with defined support and resistance. These above patterns re-occur time after time which makes them reliable and helps reinforce the tenet ‘that history repeats itself’. Much of western technical analysis has some basis from Dow Theory also.

Why has Technical Analysis regained popularity?

CitiFX released their first poll of global foreign exchange traders in late 2010. The survey found that 53% of those polled use a combination of fundamental and technical analysis in their trading with 36% using only technical strategies. Only 8% use solely fundamental analysis to trade. The Technical Analyst Q1 2011

Why do traders and other market practitioners use technical analysis?

To attempt to predict future price actions based upon observation of historical prices.

Why do people use Technical Analysis?

Here are some quotes regarding Technical Analysis; In finance, technical analysis is a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Kirkpatrick and Dahlquist. Technical Analysis: The Complete Resource for Financial Market Technicians.

It is possible that what is now called technical analysis, or market analysis, is the oldest form of financial analysis in the world. Several centuries ago in the corn markets of England and the rice markets of Japan traders developed a method of recording transactions that would enable them to see at a glance how much people had been paying for the product. With the help of that information they were able to assess where supply and demand were in balance and thus see better what price they should agree for their future transactions. Bronwin Wood, Society of Technical Analysts (UK)

While fundamental analysts examine earnings, dividends, new products, research and the like, technical analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions; these two concepts are called psych (psychology) and supply/demand. Technicians employ many techniques, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns. Wikipedia

A final word from Wikipedia:

Whether technical analysis actually works is a matter of controversy. Methods vary greatly, and different technical analysts can sometimes make contradictory predictions from the same data. Many investors claim that they experience positive returns, but academic appraisals often find that it has little predictive power. Modern studies may be more positive: of 95 modern studies, 56 concluded that technical analysis had positive results, although data-snooping bias and other problems make the analysis difficult. A Federal Reserve working paper regarding support and resistance levels in short-term foreign exchange rates "offers strong evidence that the levels help to predict intraday trend interruptions," although the "predictive power" of those levels was "found to vary across the exchange rates and firms examined". Wikipedia

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