Technical analysis is a popular way for traders to analyze the market and make investment decisions.
In this article, I’ll explain what technical analysis tools are, how they work and why professional traders use them.
1. Candlestick charting
Candlestick charting is a form of technical analysis that uses the high, low and closing prices of a security to help predict its future price.
It was developed in Japan in the 18th century, and it’s still widely used today by traders around the world.
2. Moving Average Convergence Divergence (MACD)
MACD is a trend-following momentum indicator that shows the relationship between two moving averages of prices.
It’s calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.
By observing the MACD, traders can identify whether a security is trending or not and use this information to generate buy or sell signals.
The MACD uses three different time periods for its calculations, which are displayed in histograms on either side of a center line in bars or candles.
3. Bollinger Bands
Bollinger Bands are a type of technical analysis tool that uses three lines to measure the volatility of a market.
The first line is an exponential moving average (EMA), which can be calculated by adding together n days’ worth of closing prices and dividing them by n.
The second line is two standard deviations above and below the EMA, while the third line is one standard deviation above and below the center band.
Bollinger Bands were developed in 1979 by John Bollinger, who wanted to identify price trends over time without using any subjective data points like news events or insider trading activity. In other words, he wanted something that could automatically show how volatile markets had been without having any human bias get in its way
4. Parabolic SAR
The Parabolic SAR is a technical indicator that’s used to identify potential reversals and trends in the market.
The indicator was developed by J. Welles Wilder, who also developed the Relative Strength Index (RSI) and Average True Range (ATR).
How it works: The Parabolic SAR is based on price action alone and is calculated using the current price and its prior closing prices in an exponential moving average trend line.
By adding more historical data points to your calculations of this indicator, you can enhance its performance even further.
When to use it: You should use this tool when you want to confirm a trend or anticipate changes in price direction before they happen because it tends to provide early warning signals about potential reversals or breakouts from trading ranges.
You can also use it simply as another way of analyzing charts for other traders who may not have heard of this tool yet—but keep in mind that there are many different technical indicators out there that might suit your needs better depending on what exactly you’re trying to accomplish with your analysis!
When not using it: If your goal is basic charting with no additional indicators added onto them, then we wouldn’t recommend using Parabolic SAR because there are other ways available for doing so without having any extra clutter included within those charts themselves.
5. Relative Price Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator that measures the speed and change of price movements in relation to volume.
It can be used to determine overbought and oversold conditions, which are good places to buy or sell stocks.
The RSI provides information on whether a stock has been rising or falling more quickly than its average rate, based on recent trading activity.
A high reading indicates that an asset may be experiencing an accelerated uptrend while a low reading indicates that it may be experiencing an accelerated downtrend.
The RSI measures two types of strength: “positive” strength and “negative” strength.
Positive strength occurs when prices rise faster than they fall; negative strength occurs when prices fall faster than they rise.
If you’re looking for ways to improve your investment strategy, you’ll want to pay attention to these readings because they can help you make money off of strong trending markets by buying stocks at their lows or selling them at their highs (when other investors are buying).
6. Stochastic Oscillator (STOCH)
The stochastic oscillator (STOCH) is another technical indicator that measures momentum.
It’s based on a combination of price and its own rate of change, so it’s actually a type of moving average.
The chart shows this line plotted below the price chart as dots or bars over time.
When the dots are above (above) the zero level, it means that prices are rising and the trend is up; when they are below (below) zero, prices are falling and the trend is down.
7. On-Balance Volume (OBV)
On-Balance Volume (OBV) is a momentum indicator that measures the cumulative volume of up and down movements in a security.
It is calculated by adding the volume of up days to the volume of down days and dividing it by two.
After this calculation has been made, OBV will give you an indication as to whether there are more buyers or sellers at any given time.
If there are more buyers than sellers, then OBV should be rising over time; if there are more sellers than buyers then OBV will be falling over time
8. Momentum indicators
Momentum indicators are used to identify whether a security is trending and to predict future price movements.
The Relative Strength Index (RSI), Stochastic Oscillator (STOCH), and On-Balance Volume (OBV) are examples of momentum indicators.
RSI measures the speed at which recent gains or losses occurred, while STOCH looks at how close current prices are to those that occurred during trend reversals.
OBV shows whether volume is increasing or decreasing when compared with previous days’ activity.
How to Use Technical Analysis Tools
Technical analysis tools are the most important part of your stock trading strategy, so it’s crucial that you understand how to use them properly.
The first step is to learn how to read charts and indicators. Then, take advantage of these resources:
- StockCharts.com – one of the best sites on the internet for learning how to do technical analysis in stock trading.
- FreeStockCharts.com – another great resource where you can download free historical data and also create custom candlesticks, line charts, etc…
What Does a Typical Day Look Like for a Trader Using Technical Analysis Tools?
The goal of technical analysis is to predict the future price of a stock based on its past performance.
For example, if a stock has made an all-time high in the last year and is now down by 15%, then it’s likely that it will make another new all-time high.
A trader that uses technical analysis tools to make money in the stock market will look at these things when reviewing their trading strategy:
- The chart pattern (such as a head and shoulders or double top)
- Volume indicators (such as volume-weighted average price)
- Moving averages (such as 50-day moving average), are used by many traders because they are easy to calculate and can help identify trends faster than other tools like on-balance volume charts.
Who Can Use Technical Analysis Tools?
Anyone who trades in the stock market can use technical analysis tools.
Professional traders, beginners and even investors who are new to trading can all benefit from using them.
The main advantage of using these tools is that you will be able to make informed decisions about your investments based on accurate data and trends.
This will help you improve your results and make more money over time as you learn how different stocks behave under different conditions.
What Are the Benefits of Using Technical Analysis Tools?
- You can make more money.
- You can make more informed decisions.
- You can avoid costly mistakes.
- You can learn from the experts and gain a better understanding of the market, its trends and cycles, and how you can use them to your advantage when trading stocks, options or futures contracts in your portfolio.
Why Do Traders Use Technical Analysis Tools?
Trading is a risky business, but technical analysis can be used to reduce risk.
A trader can use technical analysis to identify trends, support and resistance levels, entry and exit points.
For example, if you see that the price of gold has been rising over time and it is close to reaching its previous high but it hasn’t actually reached it yet then you could use this information in your attempt to predict when the price of gold will rise above its previous high. In other words:
- Trader 1: “I think gold is going up.”
- Trader 2: “Why?”
- Trader 1: “Because I’ve studied price action on the chart and I think that now would be a good time for me to buy.”
Should You Use Technical Analysis Tools?
In the stock market, you can use technical analysis tools to make money.
The question is: should you?
As with any other tool, the answer lies in your objectives and capabilities.
If your goal is to make a living from trading stocks or other financial instruments, then yes—use these tools!
Most professional traders use them every day to help them understand what’s happening in the market.
It’s like having x-ray vision when it comes to seeing through all the noise surrounding stocks and making better decisions as a result of that clarity.
I hope you’ve enjoyed learning about some of the most common technical analysis tools used by professional traders.
This list is by no means exhaustive, but it should give you a good idea of what’s out there and how it can help you make better decisions about your investments.
Remember that the best way to learn how to use these tools effectively is through practice and experience—and don’t be afraid to experiment!