Loading the player...

What is 'Technical Analysis'

Technical analysis is a trading tool employed to evaluate securities and attempt to forecast their future movement by analyzing statistics gathered from trading activity, such as price movement and volume. Unlike fundamental analysts who attempt to evaluate a security's intrinsic value, technical analysts focus on charts of price movement and various analytical tools to evaluate a security's strength or weakness and forecast future price changes.

BREAKING DOWN 'Technical Analysis'

Technical analysts believe past trading activity and price changes of a security are better indicators of the security's likely future price movements than the intrinsic value of the security. Technical analysis was formed out of basic concepts gleaned from Dow Theory, a theory about trading market movements that came from the early writings of Charles Dow. Two basic assumptions of Dow Theory that underlie all of technical analysis are 1) market price discounts every factor that may influence a security's price and 2) market price movements are not purely random but move in identifiable patterns and trends that repeat over time.

The Underlying Assumptions of Technical Analysis

The assumption that price discounts everything essentially means the market price of a security at any given point in time accurately reflects all available information, and therefore represents the true fair value of the security. This assumption is based on the idea the market price always reflects the sum total knowledge of all market participants.

The second basic assumption underlying technical analysis, the notion that price changes are not random, leads to the belief of technical analysts that market trends, both short term and long term, can be identified, enabling market traders to profit from investing according to the existing trend.

[Using price and price changes is just the beginning with technical analysis. If you are interested in learning how technical analysis, chart strategy, and technical indicators are all used to create actionable trading plans, check out Investopedia Academy's Technical Analysis Course.]

How Technical Analysis Is Used

Technical analysis is used to attempt to forecast the price movement of virtually any tradable instrument that is generally subject to forces of supply and demand, including stocks, bonds, futures and currency pairs. In fact, technical analysis can be viewed as simply the study of supply and demand forces as reflected in the market price movements of a security. It is most commonly applied to price changes, but some analysts may additionally track numbers other than just price, such as trading volume or open interest figures.

Over the years, numerous technical indicators have been developed by analysts in attempts to accurately forecast future price movements. Some indicators are focused primarily on identifying the current market trend, including support and resistance areas, while others are focused on determining the strength of a trend and the likelihood of its continuation. Commonly used technical indicators include trendlines, moving averages and momentum indicators such as the moving average convergence divergence (MACD) indicator.

Technical analysts apply technical indicators to charts of various timeframes. Short-term traders may use charts ranging from one-minute timeframes to hourly or four-hour timeframes, while traders analyzing longer-term price movement scrutinize daily, weekly or monthly charts.

  1. Stock Analysis

    Stock analysis is the evaluation of a particular trading instrument, ...
  2. Technical Decline

    A technical decline is a fall in the price of a security caused ...
  3. Indicator

    Indicators are statistics used to measure current conditions ...
  4. Price Action

    Price action refers to the movement of a security's price and ...
  5. Opening Range

    The highest and lowest prices of a security during the first ...
  6. Demarker Indicator

    An indicator used in technical analysis that compares the most ...
Related Articles
  1. Trading

    Basics Of Technical Analysis

    Learn how chartists analyze the price movements of the market. We'll introduce you to the most important concepts in this approach.
  2. Trading

    Technical Analysis Strategies for Beginners

    Technical analysis helps traders and investors navigate the gap between intrinsic value and market price by leveraging certain techniques.
  3. Trading

    Use Price Action Trading Strategy for Results

    Bored by the fixed rules of technical and fundamental analysis? Price action trading allows you to customize your own trading strategy.
  4. Trading

    Intro to Types of Trading: Technical Traders

    Explore in detail the technical trading approach, which looks to the past to predict the future.
  5. Investing

    Technical Vs. Fundamental: Friends or Foes?

    Experienced investors debate which one—fundamental or technical—provides higher returns.
  6. Trading

    Top 7 Books to Learn Technical Analysis

    Here are five of the best books written on technical analysis to help traders and investors understand and apply technical analysis.
  7. Investing

    Fundamentals And Technicals: Together At Last

    It's a big mistake for a fundamental investor to ignore technical analysis. Find out how to become chart smart.
  1. What types of data are necessary to make a technical analysis?

    Understand what technical analysis is, the basic theory behind employing it and what data inputs are needed to conduct it. Read Answer >>
  2. How do technical analysts predict bull markets?

    Dive into the methods and assumptions of technical analysis, and see how analysts go about trying to predict a bull market ... Read Answer >>
  3. How do I start using technical analysis?

    Technical analysis is a method of analyzing securities by evaluating current and historical price and/or volume activity. ... Read Answer >>
  4. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  5. Is Technical Analysis a Self-Fulfilling Prophecy?

    Technical analysis seems to be useful, but some say it is simply reinforcing what investors believe. Read Answer >>
  6. Why does the efficient market hypothesis state that technical analysis is bunk?

    Learn about why there are strong conceptual differences between the efficient market hypothesis and technical analysis about ... Read Answer >>
Hot Definitions
  1. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  5. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center