What is Technical Analysis in Stocks?

Maths, stats and data.

You’d think many would switch off when these three are involved.

Yet, the opposite is true. 

Technical analysis is a huge part of the stocks market and is practiced by millions of investors worldwide.

Want to know more?

Let’s hit the basics.

What Is Technical Analysis?

Technical analysis is the study of historical price action in order to identify patterns and probabilities of future movements in the market by studying price action through the use of indicators and chart patterns.

Someone who uses technical analysis is called a technical analyst. Investors who use technical analysis are known as technical investors.

Technical investors pretty much live, eat, and breathe charts to identify the trend, support and resistance, which could help them find some opportunities to invest.

They see the markets as chaotic and dynamic, but they believe that price actions are not completely random.

In fact, technical traders believe that within this state of chaos, there are identifiable patterns that tend to repeat.

Sounds complicated? Here is a simpler definition.

One day the share price is going up, another day it might be going down. But over time, if you look at the stock price’s movement, you are likely to see trends and patterns emerge. 

Know the saying, history has a tendency to repeat itself?

Well, that’s basically what all technical analysts want to be put on their tombstone.

Okay, not really, but you get the point. 

Technical analysts believe that price movements follow established patterns. 

That’s why technical traders spend a big part of their day looking for similar patterns that have formed in the past and form trade ideas believing that price could possibly act the same way that it did before.

Notice how I said ‘possibly’?

That’s because it is not so much about prediction, but rather a probability. 

This means that successful trading using technical analysis is NOT about being right or wrong.

It is about determining probabilities and taking trades when the odds are in your favor.

But more on that and charts, trends, patterns, moving averages and other aspects of technical analysis in later chapters.

For now, does technical analysis sound like something that would be more up your street?