Glossary
Technical analysis
The study of price, volume and the patterns they form on charts to judge trends and timing, as opposed to analyzing a company’s financials.
On this page
Technical analysis is the practice of studying a market's own trading data, mainly price and volume, to judge where it is likely to go next and when to act. Technicians read charts for trends, support and resistance levels, patterns and indicator signals. It contrasts with fundamental analysis, which estimates what a business is worth from its earnings, cash flows and balance sheet.
The ideas behind it
Technical analysis rests on three working assumptions. First, the price already reflects what traders know and expect. Second, prices tend to move in trends that persist for a while. Third, crowds behave in repeated ways, so certain chart shapes recur. The toolkit built on those ideas includes chart types such as candlesticks, trendlines, moving averages and oscillators such as the RSI and MACD.
Strengths and limits
Its strength is discipline: it gives clear entry and exit levels and forces a trader to define risk before acting. Its weakness is evidence. Academic studies find that many popular signals add little or nothing after trading costs, and the efficient-market hypothesis holds that past prices should not predict future ones in liquid markets. Patterns are also easy to see after the fact. The most defensible uses are risk management, trend following and testing any rule on historical data before trusting it.