Technical Analysis

Traders often use technical analysis and a stock's price history to find and make better trades.

Technical Analysis is a method of evaluating securities by analyzing one of the many statistics generated by its historic trading activity. Technical analysts believe that securities behave and trade in certain patterns because they are followed and traded by the same groups of people. The personalities or patterns can be identified by looking at the price history of the security as well as other statistics related to how it has been traded in the past. Technical analysts do not try to measure the intrinsic value of a security to see if it is over or under-priced. In fact many technical analysts do not conduct any fundamental analysis because they are not concerned with the financial health of the company sponsoring the security as much as what the market is willing to pay for it.

Technical analysis is based on three basic premises:

Price discounts everything. The current price includes all information that can affect price. There is no need to do fundamental analysis on a stock because it is already reflected in its stock price.
Prices usually move in trends. Since information does not disseminate immediately or homogenously it does not get reflected in price immediately. The price trend developed from the change in information will be dependent on the length and intensity of the dissemination of the information affecting price.
History repeats itself. If a certain stock pattern in revealed for a stock, it is likely to happen again.

Learning the basics of technical analysis always includes charting. Charting is the art of predicting a securities future price by using historical stock charts. By seeing patterns in the charts, technical analysts believe that they can forecast the direction of a securities price trend and use it to make better trades. The balance of basic technical analysis involves understanding and reading technical indicators. Technical indicators and oscillators are statistics that provide information about a security's past trading results. Indicators such as moving averages, Bollinger bands, Relative Strength Indicator, and MACD help the technical analyst predict the price trend and create a profit by trading it.

Financial Terms by BetterTrades