What is Technical Analysis?
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts believe that all relevant information is already reflected in the price and that price movements tend to follow identifiable patterns and trends.
Unlike fundamental analysis, which evaluates a security's intrinsic value based on business metrics, technical analysis focuses purely on price action and market psychology to make trading decisions and predict future price movements.
Core Principles of Technical Analysis
The Three Fundamental Assumptions
1. Market Action Discounts Everything
- • All fundamental factors are reflected in price
- • Economic, political, and psychological influences
- • Supply and demand dynamics are captured
- • No need to analyze external factors separately
- • Price is the ultimate indicator of market sentiment
2. Prices Move in Trends
- • Trends persist until definitive reversal signals
- • Uptrends: higher highs and higher lows
- • Downtrends: lower highs and lower lows
- • Sideways trends: horizontal price movement
- • Trend following is a core strategy
3. History Repeats Itself
- • Human psychology drives market behavior
- • Patterns repeat due to consistent emotions
- • Past price patterns predict future movements
- • Market cycles tend to be repetitive
- • Pattern recognition is key to success
Sponsored Insight
Advantages vs. Disadvantages
Advantages
Timing Precision
Helps identify optimal entry and exit points
Market Psychology
Captures sentiment and emotional cycles
Universal Application
Works across all markets and timeframes
Risk Management
Clear stop loss and profit target levels
Disadvantages
False Signals
Patterns can fail, leading to losses
Subjective Interpretation
Different analysts may see different patterns
Lagging Nature
Based on historical data, not predictive
Overanalysis Risk
Too many indicators can create confusion
Key Takeaways
Price Tells All: Technical analysis assumes all information is already reflected in price action and market behavior.
Pattern Recognition: Historical patterns tend to repeat due to consistent human psychology and market dynamics.
Risk Management: Technical analysis provides clear levels for stops and targets, essential for risk control.
Probability, Not Certainty: No analysis method is foolproof; focus on high-probability setups with proper risk management.
Master Technical Analysis
Explore advanced charting tools, pattern scanners, and indicator strategies
Related Trading Concepts
Fundamental Analysis
Evaluation of securities based on business metrics, financials, and economic factors.
Chart Patterns
Recognizable price formations that suggest future price movement directions.
Support & Resistance
Key price levels where buying or selling pressure causes price reactions.
Candlestick Patterns
Japanese candlestick formations that indicate market sentiment and potential reversals.
Technical Indicators
Mathematical calculations based on price and volume data for trading signals.
Trend Analysis
Methods for identifying and following the direction of price movements over time.
Technical Analysis Risk Disclaimer
Technical analysis involves significant risk and is not suitable for all investors. Past performance does not guarantee future results. Chart patterns and technical indicators can produce false signals, leading to losses. Technical analysis should be combined with proper risk management and position sizing. No trading system or methodology can guarantee profits. Markets can remain irrational longer than you can remain solvent. Always trade with money you can afford to lose and consider consulting with qualified financial professionals before making investment decisions.