A Primer on Technical Analysis

By Stock Research Pro • August 15th, 2008

Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Also referred to as chart analysis, technical analysis is the study of market action (price changes), primarily through the use of charts.

Technical analysis is not concerned with the business, but focuses strictly on the data, charts and graphics to spot trends and certain buy and sell points. It is therefore based on the notion that trading information such as change in prices or volume discloses the direction of a stock’s price much before any such direction is realized through company publications.

Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future with the belief that the current price fully reflects all information. Technical analysis can be as complex or as simple as you want but always focused almost entirely on the stock price and its patterns.

Technical analysts may employ models and trading rules based, for example, on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, cycles or, classically, through recognition of chart patterns. Technical analysts use judgment gained from experience to decide which pattern a particular instrument reflects at a given time, and what the interpretation of that pattern should be.

While technical analysis is widely used among traders and financial professionals, it is considered in academia to be pseudoscience. It is, however, one of the most useful methods to understand the trends of the stock market.

Technical analysis is frequently contrasted with fundamental analysis, the practice of studying the fundamentals of a company to determine if a business is a good investment.

More information on technical analysis


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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