Technical Analysis
IntermediateTechnical analysis is a method of evaluating and forecasting investment prices by studying past market data, mainly price movements and trading volumes, rather than a company's underlying financial performance.
Technical analysts believe that price patterns and trends reflect the behaviour of buyers and sellers, and that these patterns tend to repeat. By studying charts, they try to identify trends, turning points and good times to buy or sell.
Common tools include moving averages, which smooth price data to show trends; support and resistance levels, prices where a share has repeatedly stopped falling or rising; chart patterns, such as head and shoulders or triangles; and indicators measuring momentum or whether a share is overbought or oversold.
For example, a technical analyst might buy a share when its price rises above its 200-day moving average, interpreting this as the start of an upward trend.
Technical analysis is widely used by short-term traders. Critics argue that it lacks a strong theoretical foundation and that the efficient market hypothesis suggests past prices cannot reliably predict future ones. Studies have produced mixed results on whether technical strategies consistently beat the market after costs.
Many investors combine technical and fundamental analysis, using fundamentals to decide what to buy and technical signals to decide when.
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