What Is Technical Analysis?
Technical Analysis vs Fundamental Analysis
Technical Analysis is the practice of evaluating securities by analyzing their price and volume behavior and identifying price trends.
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The Definition of Technical Analysis
Technical Analysis is built on the assumption that a security’s price and volume history can serve as an indicator for future price movements.
Technical Analysis assumes that trading behaviors of other investors occur in patterns and that history will repeat itself.
Example of Technical Analysis
For example, Analysis Method A is developed on the premise that if a certain level of buy-volume occurs in the first three hours of market open, then investors should put a sell-limit at 1.5% higher than market open because the price of this specific security is statistically likely to decrease once it reaches this threshold.
This way, the trader will make money prior to the security’s value decreasing.
The Purpose of Technical Analysis
Generally, Fundamental Analysis is used to focus on a security’s long-term profitability, whereas Technical Analysis is used for anticipating short-term patterns which can be leveraged for short-term profits.
Technical Analysis has several limitations which investors must consider when using it.
The first is that history does not always repeat itself in the same way exactly.
Especially in efficient markets where information is symmetrical, investors will learn over time to preempt identifiable trends and behave differently, therefore changing the trend itself.
Similarly, Technical Analysis can be a self-fulfilling prophecy.
In our earlier example, if every investor uses Analysis Method A, then the security price will never reach 1.5% because the closer the security gets to 1.5%, the less investors will purchase it and push the price higher.
Hear It From the Experts
Learn more about the methods financial advisors employ in analyzing benefits and risks associated with investments. Speak to a financial advisor in Charleston, SC or if you live outside the locale, please browse through the list of areas we serve via our financial advisor page.
What Is Technical Analysis FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.