Technical analysis is the study of the historical price movement of a particular security in order to predict future price movement. Technical analysts look for patterns in charts that often repeat themselves.

Prices are driven by human behavior and our trading decisions are often driven by motivations such as greed and fear. It is common to see the market to run up prices from over-exuberance or over sell from panic. Technical analysis attempts to identify such over bought or over sold conditions so traders can make rational informed and profitable trading decisions.

An underlying assumption in technical analysis is that all relevant information is already reflected in the price action. As such, one does not need to study fundamental metrics to make an informed trading decision.

Some of the most common tools in technical analysis include moving averages, support / resistance, Relative Strength Index (RSI), and Moving Average Convergence Divergence (MACD).

### Moving Averages

Moving Averages are mathematical smoothing methods to make it easier for traders to identify price trends. They are classified lagging indicators as they are computed using past price data.

#### Simple Moving Average (SMA)

**Exponential Moving Average (EMA)**

### Support / Resistance

### Bollinger Bands

Bollinger Bands is a tool used to provide traders with a indication of whether a stock is trading high or low relative to price volatility. The most common formulation is to plot (i) the upper band as the 21 day EMA plus 2 x the 21 day standard deviation and (ii) the lower band as the the 21 day EMA minus 2 x the 21 day standard deviation.

The way some traders apply Bollinger bands to trading decisions is to buy when price touches the lower band (indicating an oversold condition) and to sell when the price touches the upper bank (indicating an overbought condition).

**Relative Strength Index (RSI)**

**Moving Average Convergence Divergence (MACD)**

The MACD is another popular momentum indicator based on the relationship between a “fast” and “slow” exponential moving averages. It is especially useful because it incorporates both price momentum and trends.

The multi-step computation begins with the MACD Line, which is often the difference between the 12 day EMA and 26 day EMA. After plotting the MACD Line, you can calculate the Signal Line, often as the 9 day EMA of the MACD Line. After plotting the Signal Line, you can draw the MACD Histogram as the MACD Line minus the Signal Line.

#### Centerline Cross Overs

The MACD is equal zero when the 12 day and 26 day EMAs cross. The MACD value will be positive if the 12 day EMA is greater than the 26 day EMA. This value will increase the more the fast EMA diverges from the slow EMA, indicating that positive momentum is increasing. Conversely, the MACD value will be negative if the 12 day EMA is less than the 26 day EMA. This value will decrease the more the fast EMA diverges from the slow EMA, indicating that negative momentum is increasing.

#### Signal Line Cross Overs

Technical analysts also use cross overs between the signal line and the MACD line as a momentum indicator. As we learned earlier, the Signal Line is a EMA of the MACD Line and will thus slightly lag the MACD Line. If the MACD Line moves above the Signal Line, this is an early indicator of positive momentum and if the MACD Line falls below the Signal Line, this is seen as an early indictor of downward momentum. You will see the signal line cross overs tend to precede centerline cross overs.