What is Technical Analysis?

Quantitative methods for evaluating price movement and making trading decisions have become a dominant part of market analysis. At one time, the only acceptable manner of trading was by understanding the factors that make prices move and determining the extent or potential of future movement. Technical analysis tries to find price patterns and trends in stock, commodity, forex or bond market and attempt to take advantage of those patterns. While technicians use various methods and tools, the study of price charts is primary. Technical analysis is lucky to exist on a ideal set of data because every price action is recorded by exchange is very precise and exact with chance of further manipulation and this way the data reflects the netting out of all information at that moment. Most of the other statistical data, although it might appear to be very specific, are normally an average value, which can represent a broad range of numbers, all of them either larger or smaller.

It is the study of supply and demand and the stock price which moves reflects the effect of demand and supply on charts. Most supply-demand relationships are not static. Technicians especially search for archetypal patterns, such as the well-known head and shoulders or double top reversal patterns, study indicators such as moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns.

Technical analysts also extensively use indicators, which are typically mathematical transformations of price or volume. These indicators are used to help determine whether an asset is trending, and if it is, its price direction. Technicians also look for relationships between price, volume and, in the case of futures, open interest.  We will study in the coming chapters what volume & open interest is. Technical analysts seek to project price movements so that the larger profits from winning trades surpass more, many smaller losing trades, producing positive returns in the long run through proper risk control and money management.

People or traders who use technical analysis for their trade or apply technical analysis in their study are most often called technicians or chartist. Some prefer the term technical market analyst or simply market analyst.  An older term, chartist, is sometimes used, but as the discipline has expanded and modernized the use of the term chartist has become less popular.