Many investors and traders discussed about fancy charting techniques, oscillators and momentum indicators. Before we go deeper into all the fancy jargons, it all comes back down to the basic understanding of technical analysis and where it came from. So, what exactly is Technical Analysis?
There are 4 main things that you should know about Technical Analysis. That is, TA consists of charts, TA is subjective, TA reflects emotions and TA can be used by different instruments.
First of all, Technical Analysis consists of charts, a lot of charts
There are many of charts can be used in Technical Analysis, some of it are Candlesticks chart, Line charts and Bar chart.
Candlesticks charts are most commonly used to represent the price movement of the instrument as each candlestick can comprehensively represent the opening, closing, high and low price of the stock. To know more about candlesticks history, chart and pattern, please stay tune to the TA series.
Bar charts are most commonly used to represent volumes of trades of a particular instrument. Each bar height or thickness represent how many trades occurred throughout the day. This type of chart is very important especially in volume trading.
Similar with bar charts, line charts are also used mostly to represent technical indicators such as stochastic oscillators or moving averages with different time frames. Line charts are perfect for this job as unlike candlesticks and bar charts, it allows us to see exact intersection points.
In conclusion, these are the general usage of the different charts :
1) Candlestick charts : Price movement of instrument in different time frames
2) Bar charts : Volume of trades of instrument
3) Line charts : Other technical indicators
Second of all, technical analysis is subjective, i.e it varies from person to person
Do not get me wrong, TA indicators themselves are derived by sophisticated mathematicians using extremely comprehensive and complicated methodology. As we all know, mathematics is an exact and non-subjective subject, hence the technical indicators too are not subjective as a knowledge itself.
However, there are various ways to use the indicators which makes it a subjective method of analyzing stock price movement. For instance, Warren Buffet and George Soros may look at the same chart, and may even use the same technical indicators, but they may end up with different target price, projections, support line or resistance line. This is because everybody has their own “go to” indicators, different risk appetite and interpretation. It does not mean that TA is inaccurate, but on the contrary, everyone may have their own personalized TA which work best for themselves.