Technical analysis is the study of past market data, through the use of charts, to predict a security’s future price. Unlike fundamental analysis, technical analysis does not focus on studying a company’s financial statements and earnings to determine a company’s intrinsic value, or its actual worth. Instead, technical analysts use charts and technical indicators to identify patterns that can suggest future price movements. They disregard the underlying data that causes the price movements and focus on what the market is valuing the stock at.
The charts themselves do not cause market action, but rather, they indicate the actions of the marketplace and what has already happened. Charts reflect trades by all market participants, such as buyers, sellers, and even insiders. Analyzing charts means that you are analyzing the behavior of all these traders. Each price on the charts reflects the actions or lack of actions by all the traders in the market.
Technical analysis can be applied to any security with historical trading data. This includes stocks, futures and commodities, fixed-income securities, forex and more. Although we will usually analyze stocks in our examples, keep in mind that these concepts can also be used on other types of securities.
For further clarifications, see how technical analysis is different from fundamental analysis. Continue reading