Meaning and definition of Technical Analysis
Technical analysis refers to a method used to gauge securities by analyzing statistics produced by market activity, like past prices and volume. Technical analysts do not endeavor to estimate the intrinsic value of a security. They rather use charts and similar tools to recognize patterns which can suggest future prospects.
As explained by Investopedia, technical analysts consider the past performance of stocks and markets to be indicators of future performance.
For example, in a shopping mall, unlike a fundamental analyst going to each store and studying the product being sold, and then deciding on whether to buy it or not, a technical analyst would sit on a bench and observe people moving in and out of the stores. Ignoring the basic value of products in the store, the decision of a technical analyst would be based on the patterns or activity of people moving in and out of each store.
Characteristics of a technical analysis
The key characteristics of technical analysis include:
- The primary characteristic of a technical analysis involves employing models and trading rules depending on price and volume transformations, like moving averages, relative strength index, regressions, business cycles, inter-market and intra-market price correlations, stock market cycles, or through identification of chart patterns.
- The second characteristic of technical analysis stands in comparison with the fundamental analysis approach to stock and security analysis. Technical analysis evaluates price, volume, and similar market info unlike fundamental analysis considering the facts of company, market, currency, or commodity.
- Finally, technical analysis is used widely among traders and financial professionals and is frequently used by active day traders, pit traders, and market makers.
Principles of Technical Analysis
The basic principle of technical analysis is that the price of a market reflects all applicable info, thus making their analysis considering the history of the trading pattern of a security more willingly than external drivers like economic, fundamental, and news events. . the key principles of technical analysis include:
1. Market action discount everything
2. Prices of a product move in trends
3. History tends to repeat itself