What is technical analysis?
Technical analysis is the study of investor behaviour and its effect on price movements in the markets.
The up and down movements that you can see on market price charts reflect the fluctuations of supply and demand. Chartists examine these up and down patterns to identify the trends they form, and so work out the likely future movements of the market concerned.
Technical vs fundamental analysis
Fundamental analysts try to determine the value of financial instruments within a market. The goal is to anticipate movements based on external events and influences, rather than look at price patterns.
To find the true value of a share, for example, fundamental analysts look at the upcoming factors that are likely to affect that share’s price. These could include the relationship between financial statements, revenue forecasts, quality of management, earnings and growth. They then make a judgement on the asset, perhaps compared to its sector or market peers, about whether it is over- or under- valued at the present time.
Technical analysis, on the other hand, draws all the information it needs directly from charts. It doesn’t look at what’s going on within the components of a market; rather, it looks only at the movement patterns of the market itself.
By examining the patterns forming on the charts, technical analysts can see how buyers and sellers are behaving. Since certain types of behaviour patterns have been seen repeatedly in the past, it’s possible to identify them as they emerge. This helps with predicting the likely future trend for the market.