What Is Technical Analysis?
Technical analysis is a method of evaluating securities by examining statistics generated by market activity, primarily past prices and trading volume. Rather than measuring a company's intrinsic value, technical analysts look for patterns in charts to predict future price movements. The core belief is that all known information is already reflected in the price, and history tends to repeat itself in predictable ways.
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Core Principles
Technical analysis rests on three main ideas. First, the market discounts everything, meaning price reflects all available information. Second, prices move in trends, so once a direction is established, it is more likely to continue than reverse. Third, history tends to repeat itself, as traders react to similar market conditions in similar ways over time.
Key Tools and Indicators
Analysts use a range of chart-based tools to interpret price data. Common ones include:
- Trendlines and moving averages to identify the direction of a trend.
- Support and resistance levels to spot price zones where buying or selling pressure is strong.
- Volume to confirm the strength behind a price move.
- Chart patterns like head and shoulders, flags, and triangles.
- Oscillators such as the Relative Strength Index (RSI) to gauge momentum and potential turning points.
Technical Analysis vs. Fundamental Analysis
While technical analysis focuses on price action and charts, fundamental analysis evaluates a security based on underlying factors like earnings, revenue, and industry conditions. Many traders use a blend of both, but the two approaches start from different premises about what drives price.
Common Applications
Traders use technical analysis across various timeframes, from intraday scalping to long-term investing. It helps identify entry and exit points, set stop-loss levels, and manage risk by defining clear parameters for trades. The approach works in stocks, forex, commodities, and cryptocurrencies.