What Is Technical Analysis?
Technical Analysis is the discipline of analyzing past price action and volume to forecast future price movement. It's based on three core premises:
1. Price discounts everything. All known information is reflected in the current price. 2. Price moves in trends. Trends persist until they don't. 3. History tends to repeat. Patterns recur because human psychology is consistent.
Technical analysts use charts, indicators (RSI, MACD, moving averages), patterns (head and shoulders, flags), and support/resistance levels to identify trading opportunities.
Strengths: Works across all asset classes and timeframes. Provides specific entry, stop, and target levels. Doesn't require accounting expertise.
Weaknesses: Sample bias (winning examples are remembered, losing ones forgotten). Self-fulfilling at major levels but unreliable in noise. Often fails at major fundamental inflection points.
The academic consensus is skeptical — most empirical studies find limited predictive power. However, in practice, many profitable traders use technicals successfully, suggesting the skill is in selection and execution rather than in indicators themselves.
Related terms
- Fundamental Analysis — Evaluating an asset's intrinsic value based on financial and economic factors.
- Trend — The general direction of price movement over a period — uptrend, downtrend, or sideways.
- Support and Resistance — Price levels where buying or selling pressure historically halts price movement.