What is Technical Analysis?
There are many ways market participants analyse or try to predict the movement of asset prices. These can be broadly grouped into Fundamental Analysis and Technical Analysis. Fundamental Analysis examines the demand and supply of an asset. Technical Analysis of the other examines the price movements or price action of an asset. Technicians believe that within an asset’s price action lie clues or patterns to the future direction of the price. The most important aspect of technical analysis is the identification of trends.
Understanding Market Trends
When analysing gold – or any other financial instrument – price movements are believed to follow market trends. Once a trend has been established, it is believed that future price movements are more likely to be in the same direction as the trend than to be against it.
There are three different types of trends:
- An upwards trend – otherwise known as a bull market
- A downwards trend – also known as a bear market
- A sideways trend – also known as a consolidating or ‘range-bound’ market
A bull market or an upwards trend means that the market is rising, encouraging buying.
A downwards or bearish market is when prices are falling, encouraging selling.
A sideways market is when prices of markets remain within a tight range for an extended period of time and don’t break out of their respective low or high.
While supply and demand play a crucial role in driving the price of Gold, demand is normally analysed on an annual basis – so it’s a long-term price driver rather than a short-term, as information and data are not constantly available or updated.
A Sideways Market
A sideways market is when prices of investments remain within a tight range for a significant period of time. They don’t make higher highs or lower lows, or breakout above or below a price – instead, they are confined within levels known as support and resistance. This can happen after a bullish or bearish trend has finished and the market is awaiting further news to see whether the trend resumes or if there will be a reversal. This price action is sometimes called “consolidation”.
Support and Resistance
When an asset price reaches a certain price level, especially one that has significance such as a new high or low, or a historically important or psychologically important number, and cannot breakthrough in multiple attempts it is referred to as resistance (if the trend has been bullish) or support (if the trend has been bearish). These levels are often key levels for technicians who look to see if the trend will now reverse.
Technical Analysis of Gold
Examining charts and price action and identifying the above patterns in gold can play an important role in trading and investment decisions. However, it should be considered just a part of a broader analysis which should also incorporate other factors. Macroeconomic news and political news both play important parts in what can move gold. Technical analysis is part of a larger toolbox that should incorporate other investment factors, as well as investment goals and risk management.