Technical analysis is based on the premise that what happens in the past can be used to predict what might happen in the future – although of course you have to remember this can never be guaranteed, which means technical analysis shouldn’t be used in isolation.
Technical analysis what traders use to study the historic price movements of markets. And by far the easiest way to do this is by looking at charts.
By examining the trends and patterns in market prices, technical analysts can interpret the behaviour of buyers and sellers to help give an indication of where the market could go next. Since there are certain types of behavioural pattern that have occurred repeatedly in the past, it’s possible to identify them as they emerge and predict the likely future movement of the market.
For example, if the share price of Big Pharmaceutical Company EFG keeps dropping to around the 100p level and then rising immediately afterwards, a technical analyst might choose to buy some shares the next time it falls to that price, predicting that the pattern will repeat itself.
In the technical analysis world, the 100p level is called a support level. We’ll study support levels and other patterns in more detail later in this course – but before we do that, in the next section we’ll take a quick look at the three main types of chart you can use to analyse financial markets.
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