Technical analysis is a method of predicting the future direction of a market’s price, by studying historical chart patterns and formations.
In its truest form, technical analysis disregards any fundamental information on an asset than cannot be found on its price chart. Instead, a set of tools known as technical indicators are overlaid onto a chart to identify recognisable price patterns.
Price movement on charts is usually shown in the form of candlesticks, which illustrate key points about a market’s price in a given period of time. The colour of the candlestick denotes whether it has moved up (green) or down (red) in price, and the bars on the candlestick show the opening, closing, highest and lowest prices.
There are many different indicators that technical analysts will use on charts. Here we’re going to take a look at two of the most popular: support and resistance, and moving averages.
Support and resistance
Support and resistance levels are areas on a chart that a market’s price has difficulty breaking through. Support is found when a falling market hits a given level and bounces; resistance is formed when a rising market hits a high and falls.
The more times that a market hits a point of support or resistance and reverses, the more reliable that projected line will be for future support or resistance levels. And when an established support level is broken, it may turn into a resistance level, or vice versa.
Another commonly used indicator is the simple moving average (SMA). This is the average price of market over a given period of time, which can be used to identify significant support or resistance levels.
The most popular periods used for calculating moving averages are 50, 100 or 200 days. As a market increases in price, the SMA can act as a significant area of resistance. If it is in a down trend, the SMA can act as an area of support.