Graphical analysis is a method of technical analysis in which the trader studies or analyses the price charts in order to identify chart patterns. These chart patterns are indicative of future price movement of an asset and constitute an important tool of technical analysis.
There are several chart patterns that can be deduced from graphical analysis. Some chart patterns are reversal patterns (which indicate that a trend is over and is about to reverse), while others are continuation patterns that indicate that prices will resume in the direction of the previous trend.There are two main methods of graphical analysis:
Manual graphical analysis involves the trader poring through charts in order to identify the patterns that will act as a guide on what trade position to take.
Automated graphical analysis involves the use of automated software that can be attached to the charts as plug-ins, and this software identify the chart patterns and display their names on the charts. The trader can then take action based on the chart pattern identified by the software.