In its most basic form, technical analysis is the examination of price series data for consistently recurring patterns. Most often data is graphically displayed in a standard bar chart format. This consists of a line connecting the high and low, with a small mark placed on the left for the open and the right for the close. Each bar represents whatever specific time frame the trader is interested in studying, and generally ranges from between 5 minutes to 1 month. Often below the price chart analysts will plot volume and open interest (for futures). There are also numerous mathematical renditions of the price data that can be overlaid or plotted on the chart, such as moving averages, oscillators and the like. The following bar chart shows the March 2015 Euro Currency with a volume and open interest plot.
A technical analyst will study charts for certain patterns or apply tools such as moving averages or trend lines in an effort to help make trading decisions. When analyzing charts a trader should begin by looking at the longer-term time frames and then stepping down to shorter and shorter periods. That’s because what may look like a strong down trend on a 30-minute chart will show up as a short-term correction in a strong up trend on the weekly. No matter what time frame a trader plans on holding positions, it is wise to have a full understanding of what all the longer-term charts are doing.
Technical analysis is a very excellent way to manage risk.