What Is Technical Analysis?

3 min read

What Is Technical Analysis?

Technical analysis identifies statistical trends in historical price activity to evaluate investment and trading opportunities. Unlike fundamental analysis, which attempts to determine an asset’s value based on business outcomes, technical analysis uses price movement, volatility, and volume to determine an asset’s value.

Technical analysis uses charting tools, like depth charts or candlestick charts, to anticipate short-term trading changes. It can also improve analysts’ overall valuation of the asset and its strength or weakness relative to the general market or other assets of the same section. Technical analysis can be applied to any asset with historical trading data, and is most commonly used in commodities markets where traders are focused on short-term price movements.

Learn more about how to read a depth chart.

Basics of Technical Analysis

Technical analysis assumes that past trading activity and price changes are a valuable indicator of future price movements when combined with best-practice investing or trading rules. Most analysts do not rely on technical analysis alone, but rather use technical analysis alongside other research such as fundamental analysis. Retail traders may not have access to the research private traders do, and they may make trading decisions based exclusively on technical data.

Technical analysis theory was first introduced by Charles Dow, and his early writings on the subject illustrated three assumptions made in technical analysis that most investors and traders still uphold today.

The Market Prices in All Known Information

Technical analysts believe the Efficient Market Hypothesis, which states that all available information is already priced into the asset. The only remaining information to be analyzed is past price movements, which technical analysts define as the result of supply and demand for a particular asset in the market.

Learn more about the Efficient Market Hypothesis.

Technical analysts believe that asset prices will produce trends, even in seemingly random price movements and regardless of the time frame of the analysis. Most technical trading strategies are based on the assumption that an asset price is most likely to continue a current or previous trend . The assumption that prices have trends is attributed to market psychology, and allows technical analysts to analyze chart patterns for emotions and related market movements.

Difference Between Technical Analysis And Fundamental Analysis

Fundamental analysis and technical analysis are both used for researching and predicting future trends in asset prices. However, they evaluate asset prices based on different information. Fundamental analysis tries to measure the intrinsic value of an asset by assessing the industry, company, and general accomy that the asset resides in. Technical analysis only assesses the asset’s price and volume. Technical analysts believe that all of the known factors analyzed in fundamental analysis are factored into the price, and there is no benefit to further analyzing them. Technical analysts also do not try to measure long-term value. They use charts to identify patterns and trends that suggest what an asset price will do in the near future. However, technical analysis is imperfect and often unreliable.

Key Takeaways

  • Technical analysts believe historical price charts can be used to evaluate investment and trading opportunities.
  • Technical analysis theory was introduced by Charles Dow.
  • Technical analysis assumes that The Efficient Market hypothesis holds true