What Is Technical Analysis?

Technical Analysis is a trading discipline employed to gauge investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.

Understanding Technical Analysis

Unlike fundamental analysis, which attempts to gauge a security's value based on business results such as sales and earnings, technical analysis targets the research of price and volume. Technical analysis tools are accustomed to scrutinize the ways supply and demand for a security will affect changes in price, volume, and implied volatility.

Technical analysis is frequently used to generate short-term trading signals from various charting tools, but may also help improve the evaluation of a security's strength or weakness in accordance with the broader market or certainly one of its sectors. This information helps analysts improve their overall valuation estimate.

Technical analysis can be utilized on any security with historical trading data. Including stocks, futures, commodities, fixed-income, currencies, and other securities. In this tutorial, we'll usually analyze stocks inside our examples, but bear in mind these concepts may be applied to any kind of security. Actually, technical analysis is much more prevalent in commodities and forex markets where traders concentrate on short-term price movements.

Technical analysis as we realize it today was first introduced by Charles Dow and the Dow Theory in the late 1800s.1 Several noteworthy researchers including William P. Hamilton, Robert Rhea, Edson Gould, and John Magee further contributed to Dow Theory concepts helping to make its basis. Nowadays technical analysis has evolved to include a huge selection of patterns and signals developed through years of research.

Technical analysis operates from the assumption that past trading activity and price changes of a security may be valuable indicators of the security's future price movements when paired with appropriate investing or trading rules. Professional analysts often use technical analysis in conjunction with other styles of research. Retail traders could make decisions based solely on the purchase price charts of a security and similar statistics, but practicing equity analysts rarely limit their research to fundamental or technical analysis alone.

Among professional analysts, the CMT Association supports the greatest collection of chartered or certified analysts using technical analysis professionally across the world. The association's Chartered Market Technician (CMT) designation may be obtained after three degrees of exams that cover both a broad and deep look at technical analysis tools. The association now waives Level hands down the CMT exam for folks who are Certified Financial Analyst (CFA) charterholders. This demonstrates how well the two disciplines reinforce each other.2

Technical analysis attempts to forecast the purchase price movement of virtually any tradable instrument that is generally at the mercy of forces of supply and demand, including stocks, bonds, futures, and currency pairs. Actually, some view technical analysis as simply the research of supply and demand forces as reflected in the market price movements of a security. Technical analysis most commonly pertains to price changes, however many analysts track numbers other than simply price, such as trading volume or open interest figures.

Across the, you can find a huge selection of patterns and signals which have been developed by researchers to aid technical analysis trading. Technical analysts have developed numerous kinds of trading systems to help them forecast and trade on price movements. Some indicators are focused primarily on identifying the existing market trend, including support and resistance areas, while others are centered on determining the potency of a tendency and the likelihood of its continuation. Commonly used technical indicators and charting patterns include trendlines, channels, moving averages, and momentum indicators.

Underlying Assumptions of Technical Analysis

You will find two primary methods used to analyze securities and make investment decisions: fundamental analysis and technical analysis. Fundamental analysis involves analyzing a company's financial statements to ascertain the fair value of the business enterprise, while technical analysis assumes that the security's price already reflects all publicly available information and instead targets the statistical analysis of price movements. Technical analysis attempts to comprehend industry sentiment behind price trends by looking for patterns and trends rather than analyzing a security's fundamental attributes.