However, Technical Analysis, when properly understood and used wisely, will help any trader or investor to sort through noise and identify significant elements that can support a rational choice to buy or sell. If for no other reason, Technical Analysis will lend a systematic approach to the market.
The theory is, therefore, all that is known or is knowable about a specific security should be displayed in its historical price and volume action. It is our job to identify the probable outcomes in the future based on this data and pattern repetition.
Technical analysis is the study of price movements, share volume, and price relationships. As stock prices change, they develop a pattern of behavior at certain levels that tend to repeat and are, therefore, recognizable. Price fluctuations over a period of time are compiled to form a chart that will visually represent the formation of patterns. At its simplest form, the most basic tool of a technical analyst is a chart. Because a chart allows a stock trader to observe the formation of a recognizable pattern, it is possible, to varying degrees, to anticipate future price behavior. With careful analysis, planning, proper order execution and risk management, it is also possible to benefit from properly interpreting chart patterns.
Prices of securities also have a tendency to correlate with prices of other financial instruments or other stocks. For example, a large downside move in prices of the S&P 500 Futures index has a tendency to affect prices of certain securities that are sensitive to fluctuations in that index. A large price move in an industry leader, such as Microsoft (MSFT on the NASDAQ), has a strong tendency to affect price action in Intel (INTC on the NASDAQ), another industry leader. When trading a stock, it is of significant advantage to the Direct Access Trader to know, and properly interpret, what affects the price of the stock on a technical basis. This is especially true, in a frequently traded stock, in order to have an advantage over others trading (or investing) in that stock.
While technical analysis does not have to be complex, traders primarily relying on technical analysis for trading guidelines tend to move deeper and deeper into the mathematics of price action. However, most successful traders develop remarkably simple methods. Keep your trading simple and stay close to the old rules. It generally pays off in the long run.
