Technical analysis in trading involves evaluating and analyzing past price movements, trading volumes, and other market data to forecast future price trends. It uses charts, indicators, and patterns to make informed decisions about buying and selling assets.
Unlike fundamental analysis, which focuses on the intrinsic value of an asset, technical analysis focuses on the price action and market sentiment.
Key aspects of technical analysis include:
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Price charts: this is the most basic tool in technical analysis, showing the historical price movement of an asset. Common chart types include line charts, bar charts, and candlestick charts;
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Indicators and oscillators: tools like Moving Averages, RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence), and Bollinger Bands help traders assess the market's momentum, volatility, and trend direction;
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Support and resistance: levels where the price tends to stop or reverse. Support is a price level where demand is strong enough to prevent the price from falling further, while resistance is a level where selling pressure can prevent the price from rising higher;
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Chart patterns: traders look for formations like head and shoulders, triangles, and double tops/bottoms to predict future price movements;
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Trend lines: lines drawn to identify the direction of the price movement, helping traders spot bullish (upward) or bearish (downward) trends.
Technical analysis assumes that all market information is already reflected in the asset's price and that price movements are not entirely random, but tend to follow patterns over time. It is commonly used for short-term trading strategies.
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