What Is Involved in Technical Analysis Trading?

Mary McMahon
Mary McMahon

Technical analysis trading relies on careful review of securities markets to make projections about future trends. This information is used by the trader to make decisions about market positions, purchases, and sales. It is dependent on the belief that market movements can be predicted through careful analysis, and is sometimes a topic of dispute. Some traders believe it is not possible to apply technical analysis to trading because markets are not consistent enough to follow predictive patterns.

Businessman with a briefcase
Businessman with a briefcase

Several tools are used in technical analysis trading. The first is straightforward quantitative review of market information. Traders look at pricing and volume of trading to generate information about historic pricing and market activities. Securities known to be volatile, for example, will exhibit very different behaviors from those that tend to trade more steadily. This information can help a trader see how a security has behaved in the past.

Behavioral economics, the study of the human factors that influence the market, is also part of this trading discipline. Traders look at the psychology behind decisions, particularly mass decisions, to collect data on how people behave in securities markets. They can use historic events to gather information about how people tend to act in response to falling or rising prices, major political events, and other factors. This allows traders to make some predictions about how people may behave in the future.

The combination of qualitative study of the market and the behavioral factors can permit traders to make informed purchase decisions based on this information. In technical analysis trading, predictions center on where trends may start and stop, to allow a trader to buy or sell at the right time. These predictions constantly evolve in response to new information that may change market behavior. This forecasting can extend over days, weeks, or months, depending on the type of analysis performed.

Controlled studies on technical analysis trading can be difficult to conduct. Traders working in the real world with actual money may make decisions very different from those of study subjects operating in a hypothetical environment. Researchers can track different groups of traders over time, but their decisions may not always follow rational trading rules; a technical analyst, for example, might make a spontaneous decision that would skew the results. A variety of books are available with information on specific analytical techniques people can use. Some may tout remarkable outcomes, but these should be taken regarded with some skepticism, as technical analysis trading requires experience and skill.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Forgot password?