Intro to Technical Analysis

History Tends to Repeat Itself Due to Human Behavior

If history has taught us anything, it’s that human behavior usually leads to repeated reactions to similar market environments. When faced with the same or similar sets of conditions and circumstances, market participants generally tend to react the same way.  While this may not be true on an individual basis, as an aggregate group, reactions can often be anticipated and revisited across historical trading chart data in the form of identifiable patterns. 

Prices Tend to Trend

The saying “the trend is your friend” is a simple way of understanding that trends are where futures traders hope to make a profitable trade.  From a trader’s point of view, a trend needs to be identifiable and actionable—otherwise it isn’t very useful.  Technical analysis has a variety of tools that help traders identify trends in the futures markets and potentially when a trend is exhausted.

The Traded Price of a Futures Contract is a Reliable Interpretation of Market Conditions

The efficient market hypothesis (EMH) states that the traded prices for futures contracts generally reflect all the information the market participants know about that market including economic reports, unexpected news, rumors, and empirical facts. Based on this concept, the market data—and therefore the technical indicators applied to that data—can be said to be a reasonably reliable interpretation from a mathematical or observable point of view. 

The most popular form of technical analysis is Trend analysis. Understanding the direction of a trend can help shape your bias for the trading day. The most common trend indicator is the simple moving average (SMA), which averages the closing price for many lookback bars.  

Momentum is the rate at which prices change over time. Momentum indicators attempt to quantify this rate of change to identify whether a market might be considered overbought or oversold. Relative strength index (RSI) and stochastics are the most common types of momentum indicators.

Volatility is the tendency for price to change—that is, how much can we expect the price of a market to go up or down? Volatility studies like average true range (ATR) can be applied directly to a price chart at any timeframe, allowing for shorter- to longer-term analysis. 

Volume can aid in understanding market sentiment or participation, which is helpful when determining whether a price move is “valid” (i.e., trend should continue in that direction) or not (i.e., a price move that reverts in the opposite direction).