Technical Analysis main tools

  • Technical analysts typically use a range of tools to analyse market prices. These tools include the following:

    Charting

    A price chart plots a series of prices over a particular time period. The timescale is plotted on the horizontal axis (x axis) whilst the price scale is on the vertical axis (y axis). Prices are plotted from left to right on the x axis.

    Charts are important for defining trends, finding suitable entry and exit points and looking for chart patterns. A technical analyst would use charts as their main tool when looking for trading opportunities.

    Line, open high low close (OHLC) and candlesticks are the most common charts used by technical analysts.

    Line chart

    Line charts plot a line between a series of data points dictated by the settings used within the chart. For example, if the settings dictates ‘closing prices’ and ‘daily’ then the chart will automatically draw a line between each daily closing price. Line charts are a great way to get an instant visualisation of where current prices are trending.

    OHLC chart

    The OHLC chart plots four pieces of information: open, high, low and close. By including both the opening price and closing price, a trader can immediately see if the price has closed higher or lower than the open.

    The opening price is plotted on the left-hand side of a vertical bar, which represents the high and the low of the trading range.

    The close is plotted on the right-hand side of the vertical bar. OHLC charts are a good instant representation of the typical price range for a specified period.

    Candle chart

    A candle chart contains the same information as the OHLC. However, candle charts are much more visual and contain a ‘body’, which is the difference between the opening and closing price.

    When the close is higher than the open price, the body is ‘hollow’. If the close is lower than the open, the body is ‘filled’.

    The thin lines above the body are referred to as the ‘shadows’ and are simply the high and low prices.

    (All of these chart types are available to our clients. Simply open an account to access our powerful charting tools.)

    Timeframes

    Charting is a useful form of looking back and seeing how a market price has performed over a specified time period.

    You can choose different timeframes to determine a trend over short, intermediate and longer-term time periods, based on your personal trading style and strategy.

    For example, if you’re looking to trade for a few days, you’re most likely to use either an hourly or daily timeframe, rather than a yearly one.

    Popular short-term timeframes usually range from five minutes to 60 minutes. If you wanted to hold positions for more than a few hours, you might look at daily charts for an intermediate time frame, while weekly and monthly charts would be used for your longer-term trades.

    By utilising different timeframe charts, traders and analysts can look for support and resistance levels where a security could find potential reversals.

    Technical indicators

    If you have a City Index account, you can benefit from access to our interactive live-pricing charting package, which includes a range of powerful technical analysis tools.

    Technical indicators plot a series of data based on price and/or volume. These indicators are used by traders, along with additional information, to make informed trading decisions.

    There are many different types of indicators available, which can be useful to provide signals for:

    Trends – the current bias to which prices are trading (bullish/ bearish/ sideways).

    Momentum – the strength of the current trend.

    Divergences – when the price of a financial market and an indicator diverge in trend i.e. move in opposing directions.

    Reversals – when a price trend reverses.

    Some indicators are useful in trending markets while others, referred to as oscillators, can be used in range-bound markets to find overbought and oversold conditions, which can then be used to spot potential price reversals.

    There are many ways to use technical indicators and, if used sensibly, they can help you to make better trading decisions.

    Trading with technicals

    In today’s fast-paced financial markets, finding trading opportunities and using chart patterns and technical indicators are important. We offer you the ability to use powerful tools with a combination of technical indicators and different charting styles to suit your needs across different time frames.

    Open a City Index account or an MT4 account to take advantage of our sophisticated charting packages and features.

    Fundamental analysis

    Now that you've learnt about technical analysis, discover another important analysis type