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Last Updated: Sep 2009
Last Updated: Sep 2009
Technical analysis is not intended to be anywhere near 100% accurate in predicting price movements. Rather, the goal is to produce predictions of price direction and magnitude such that large gains from the relatively few correct predictions are more than enough to offset the many smaller losses from incorrect predictions, leading to a positive return in the long run through proper risk control and money management.
Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.
Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.
The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market.
Technical analysis assumes that non-random price patterns and trends exist in markets, and that these patterns can be identified and exploited. While many different methods and tools are used, the study of charts of past price and trading action is primary. Technical analysts search for current price activity resembling archetypical patterns, such as the well- known head and shoulders reversal pattern, and also study the graphs of mathematical "indicators" derived from price and/or volume action, such as the popular moving average.
Technical analysis assumes that non-random price patterns and trends exist in markets, and that these patterns can be identified and exploited. While many different methods and tools are used, the study of charts of past price and trading action is primary. Technical analysts search for current price activity resembling archetypical patterns, such as the well- known head and shoulders reversal pattern, and also study the graphs of mathematical "indicators" derived from price and/or volume action, such as the popular moving average.
