{"id":129636,"date":"2023-11-26T11:46:47","date_gmt":"2023-11-26T11:46:47","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&#038;p=129636"},"modified":"2023-11-27T15:44:31","modified_gmt":"2023-11-27T15:44:31","slug":"technical-analysis","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/technical-analysis","title":{"rendered":"Technical Analysis"},"content":{"rendered":"<h2><span id=\"what_is_technical_analysis\">What is Technical Analysis?<\/span><\/h2>\n<p>Technical analysis is a trading discipline that seeks to identify opportunities in the financial markets by analyzing statistical trends based on historical price movements and volume along with past trading activity.<\/p>\n<p>Unlike fundamental analysis, technical analysis does not attempt to measure a security&#8217;s intrinsic value. Instead, technical analysts focus solely on studying the price action of a given financial asset to make predictions about where the price may be headed in the future.<\/p>\n<h2><span id=\"how_does_technical_analysis_work\">How Does Technical Analysis Work?<\/span><\/h2>\n<p>Technical analysts believe that all known fundamentals are already factored into a stock&#8217;s market price. As a result, they do not pay much attention to intrinsic value calculations, management performance, or other business metrics. The core assumption is that all public information is reflected in the <a href=\"https:\/\/www.techopedia.com\/definition\/stock\">stock<\/a>&#8216;s price path.<\/p>\n<p>Instead, they study <a href=\"https:\/\/www.techopedia.com\/definition\/supply-and-demand\">supply and demand<\/a> dynamics through price trends and patterns. The repetitive nature of price movements is attributed to market participants\u2019 psychological biases and emotions.<\/p>\n<p>As <a href=\"https:\/\/www.techopedia.com\/definition\/fear-and-greed-index\">fear and greed<\/a> are repetitive traits, technicians expect similar price patterns to unfold throughout time. By scrutinizing price charts across different time horizons, analysts aim to forecast where the price is heading next.<\/p>\n<p>The most common time frames studied include 1-minute, hourly, daily, and weekly charts spanning weeks to decades. Intraday scalpers may focus on 5-minute charts, while long-term investors examine multi-year weekly charts.<\/p>\n<p>The goal is to identify trading opportunities by gaining an edge in determining situations where supply and demand are likely to shift, causing prices to change direction. This allows technical traders to target entries, stop losses and profit-taking levels.<\/p>\n<h2><span id=\"key_assumptions_of_technical_analysis\">Key Assumptions of Technical Analysis<\/span><\/h2>\n<p>Technical analysis operates under three core assumptions:<\/p>\n<ul>\n<li><strong>Prices Discount All Known Information<\/strong>: Current prices fully reflect all available information and represent the fair value of the <a href=\"https:\/\/www.techopedia.com\/definition\/asset-class\">asset<\/a>. Technical analysts do not question whether an instrument is being properly valued or not. The actual market price is what matters most.<\/li>\n<li><strong>Price Moves in Trends<\/strong>: Price changes tend to trend and move in one direction for sustained periods despite random short-term fluctuations. This allows analysts to identify trading opportunities in the dominant direction of the trend.<\/li>\n<li><strong>History Tends to Repeat<\/strong>: Recurring price patterns provide predictive signals about the most likely future price movement. Past price behavior and extremes tend to act as support and resistance for future moves.<\/li>\n<\/ul>\n<p>Technicians lean heavily on these assumptions to forecast where prices are heading next and solely rely on charts and market data instead of business results.<\/p>\n<h2><span id=\"types_of_technical_analysis_indicators\">Types of Technical Analysis Indicators<\/span><\/h2>\n<p><img decoding=\"async\" class=\"aligncenter size-full wp-image-130680\" src=\"https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/11\/5-Types-of-Technical-Analysis-Indicators.jpg\" alt=\"5 Types of Technical Analysis Indicators\" width=\"1390\" height=\"988\" srcset=\"https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/11\/5-Types-of-Technical-Analysis-Indicators.jpg 1390w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/11\/5-Types-of-Technical-Analysis-Indicators-300x213.jpg 300w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/11\/5-Types-of-Technical-Analysis-Indicators-1024x728.jpg 1024w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/11\/5-Types-of-Technical-Analysis-Indicators-768x546.jpg 768w, https:\/\/www.techopedia.com\/wp-content\/uploads\/2023\/11\/5-Types-of-Technical-Analysis-Indicators-1200x853.jpg 1200w\" sizes=\"(max-width: 1390px) 100vw, 1390px\" \/><\/p>\n<p>There is a vast array of technical indicators and chart patterns available, but most fall into the following five categories:<\/p>\n<ol>\n<li><strong>Trend Lines<\/strong>: Identify areas of support or resistance through historical price extremes and trend channel boundaries.<\/li>\n<li><strong>Moving Averages<\/strong>: Smooth out price data to more clearly identify the current <a href=\"https:\/\/www.techopedia.com\/definition\/market-trend\">market<\/a> trend and direction.<\/li>\n<li><strong>Momentum Oscillators<\/strong>: Gauge the rate of change in prices to determine overbought or oversold conditions.<\/li>\n<li><strong>Volume Indicators<\/strong>: Utilize volume data to assess trading conviction behind price trends.<\/li>\n<li><strong>Chart Patterns<\/strong>: Well-known classical chart formations that suggest likely future price movement when they emerge.<\/li>\n<\/ol>\n<p>Beyond hundreds of specific technical indicators and systems, almost all technical analysis systems incorporate various metrics, including the ones cited above, when analyzing price charts to spot potential <a href=\"https:\/\/www.techopedia.com\/investing\/best-stock-trading-signals\">trading signals<\/a>.<\/p>\n<h2><span id=\"implementing_technical_analysis\">Implementing Technical Analysis<\/span><\/h2>\n<p>Technical analysis employs a top-down approach beginning with a broad market assessment. Here\u2019s how that step-by-step process works:<\/p>\n<p><strong>Market Trend Analysis<\/strong><\/p>\n<p>Technicians determine the overall market trend across major indices like the <a href=\"https:\/\/www.techopedia.com\/definition\/sp-500-index\">S&amp;P 500<\/a> for stocks or others that are considered representative of the type of asset that they will be trading. Most traders prefer to \u2018follow the trend\u2019 although some choose to be contrarian and place bearish bets in a bull market.<\/p>\n<p><strong>Sector Rotation Tracking<\/strong><\/p>\n<p>Specific sectors showing the most relative strength are typically favored if the market is trending higher. Meanwhile, the weakest sectors are preferred during bearish cycles.<\/p>\n<p><strong>Individual Stock Selection<\/strong><\/p>\n<p>After filtering first by sector, <a href=\"https:\/\/www.techopedia.com\/investing\/best-tech-stocks\">analysts select stocks<\/a> that show technical alignment with the current market trend. They tend to lean toward chart patterns and indicator signals that can lead to major price movements that they can profit from the most.<\/p>\n<p>Decisions are made constantly based on how the price is behaving and the different entry and exit targets the trader has established.<\/p>\n<p>While fundamental developments contribute to shaping the price action, technical factors dominate the decision-making process for technical analysts.<\/p>\n<h2><span id=\"strengths_and_weaknesses_of_technical_analysis\">Strengths and Weaknesses of Technical Analysis<\/span><\/h2>\n<p>As with all disciplines and approaches, technical analysis has its own set of pros and cons. Here\u2019s a list of the strengths and weaknesses of this particular methodology.<\/p>\n<h3>Advantages<\/h3>\n<p><span style=\"font-weight: 400\"><div class=\"su-table su-table-responsive su-table-alternate\"><\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Advantages<\/b><\/td>\n<td><b>Description<\/b><\/td>\n<\/tr>\n<tr>\n<td><strong>Identify Trading Opportunities<\/strong><\/td>\n<td><span style=\"font-weight: 400\">Charts help traders recognize key support\/resistance levels, momentum shifts, and breakouts.<\/span><\/td>\n<\/tr>\n<tr>\n<td><strong>Risk Management<\/strong><\/td>\n<td><span style=\"font-weight: 400\">Price\/indicator discipline provides valid entries and exits that help traders keep their losses in check while profiting the most during upswings.<\/span><\/td>\n<\/tr>\n<tr>\n<td><strong>Trend Following<\/strong><\/td>\n<td><span style=\"font-weight: 400\">By following the trend, traders increase the odds of turning a profit by choosing to stick to the path set forth by market participants.<\/span><\/td>\n<\/tr>\n<tr>\n<td><strong>Versatility<\/strong><\/td>\n<td><span style=\"font-weight: 400\">Technical assessments can be applied to any liquid market with enough historical data.<\/span><\/td>\n<\/tr>\n<tr>\n<td><strong>Simplicity<\/strong><\/td>\n<td><span style=\"font-weight: 400\">Pure price\/volume analysis avoids the complexities of business valuation.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"font-weight: 400\">\u00a0<\/span><span style=\"font-weight: 400\"><\/div><\/span><\/p>\n<h3>Disadvantages<\/h3>\n<p><span style=\"font-weight: 400\"><div class=\"su-table su-table-responsive su-table-alternate\"><\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Disadvantages<\/b><\/td>\n<td><b>Description<\/b><\/td>\n<\/tr>\n<tr>\n<td><strong>Subjectivity<\/strong><\/td>\n<td><span style=\"font-weight: 400\">The interpretation of certain patterns and charts may differ among technicians.<\/span><\/td>\n<\/tr>\n<tr>\n<td><strong>Data Rationalization<\/strong><\/td>\n<td><span style=\"font-weight: 400\">It is tempting to fit one\u2019s analysis to preconceived views.<\/span><\/td>\n<\/tr>\n<tr>\n<td><strong>Lagging Nature<\/strong><\/td>\n<td><span style=\"font-weight: 400\">By the time some trends are clear, much of the price movement has occurred.<\/span><\/td>\n<\/tr>\n<tr>\n<td><strong>Never Fully Proven<\/strong><\/td>\n<td><span style=\"font-weight: 400\">Technical analysis indicators are probability tools, not foolproof predictive signals.<\/span><\/td>\n<\/tr>\n<tr>\n<td><strong>Prone to Failures<\/strong><\/td>\n<td><span style=\"font-weight: 400\">No approach works 100% of the time across all conditions.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"font-weight: 400\"> <\/div><\/span><\/p>\n<p>The arguments and discussions in favor and against technical analysis continue today. Used prudently, it can serve as an effective component of an overall investing approach. Technicians aim to tip odds favorably, not achieve perfection. Blending technical and fundamental analysis can overcome individual weaknesses.<\/p>\n<p>Technical analysis provides trading rules based on price trends and patterns. By analyzing charts, it aims to forecast future price direction through supply and demand changes. Technicians believe that current prices already reflect all available information. While far from flawless, this practice offers measurable ways to identify and manage trading opportunities and signals.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is Technical Analysis? Technical analysis is a trading discipline that seeks to identify opportunities in the financial markets by analyzing statistical trends based on historical price movements and volume along with past trading activity. Unlike fundamental analysis, technical analysis does not attempt to measure a security&#8217;s intrinsic value. Instead, technical analysts focus solely on [&hellip;]<\/p>\n","protected":false},"author":286654,"featured_media":130395,"comment_status":"open","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"_lmt_disableupdate":"","_lmt_disable":"","om_disable_all_campaigns":false,"footnotes":""},"definitioncat":[2686],"class_list":["post-129636","definition","type-definition","status-publish","format-standard","has-post-thumbnail","hentry","definitioncat-economics"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.2 (Yoast SEO v24.5) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What is Technical Analysis? 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