The 3 Main Types of Technical Analysis
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There are 3 main categories of technical analysis methods that are used by all traders:
- Classical charting
- Technical indicators
- Price action
Since I will be doing separate guides for each of these methods, for now I will be briefly going through each one.
1. Classical Charting
These were the very first tools developed by traders, back when there were no computers and charts had to be plotted and analysed manually.
They include things like swing counts, support and resistance levels, trendlines, channels, price patterns, etc.
Even today, most traders still use these methods, usually in conjunction with other methods.
2. Technical Indicators
With the advent of computers, traders started using them to crunch numbers, and by applying mathematical formulas (using the open, high, low, close, volume data) were able to add another dimension of analysis which was not always obvious by visual observation.
There are thousands of indicators, but the common ones used are moving averages, MACD (moving average convergence divergence), RSI (relative strength index), Stochastics, Bollinger Bands, etc.
3. Price Action
Price action is a pretty broad category, but the main idea is to study the movement of price, while understanding the underlying reasons for such moves.
In the past, one such method was tape-reading, which has now evolved to reading the price ladder and order flow. but these are more for intraday traders on very short timeframes. I used to do that when I was trading for funds.
For retail traders, the more common approach is to study candlestick patterns, which is to identify unique clusters of bars, but for more advanced price action, it involves studying every single individual bar.
Most traders will use a combination of all 3 methods, since they are not mutually exclusive. The idea is to find a combination of tools that can enable you to find good trading opportunities with the least amount of effort.
If you would like to learn how to get started in trading, also check out: “The Beginner’s Guide to Trading & Technical Analysis”
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