Table of contents
What is technical analysis?
What is technical analysis and is it right for me?
Technical analysis is the study of market action primarily through the use of charts, for the purpose of forecasting future price trends. The term market action mainly refers to price but can also include volume and open interest.
The technical analyst believes in 3 behaviours:
- Market action discounts everything
- Prices move in trends
- History repeats itself
To use technical analysis you must agree with these 3 behaviours. Items 2 and 3 are not too contentious but item 1 can take some believing.
Market Action Discounts Everything
The reason this is a necessary belief is because it allows the technical analyst to focus purely on market action. All this is really saying is that anything that can affect a price is already reflected in the price, whether that is fundamental, political, psychological, or some other source. With technology as it is today this is very believable. The vast majority of people have access to the same information from various news sources.
This is the primary reason that technical analysis and fundamental analysis are seen as contrary approaches.
Prices Move In Trends
It is hard to disagree that prices move in trends. The chart below shows a monthly chart for the S&P 500.
A technical analyst has to believe that markets trend otherwise there is little point trying to predict price. If markets do not trend they become unpredictable in nature and may border on chaotic.
History Repeats Itself
History repeats itself and so do the markets. When money is at stake, human behaviour and psychology come into play. The thought of missing out (greed), the thought of losing (fear), are key tenants of market psychology. These thought processes have not changed over the years and are ingrained into us.
If you are still unsure whether technical analysis is right for you then take a look at our comparison page. We identify the pros and cons of technical and fundamental analysis.