Technical Analysis

Investment Dictionary -> Technical Analysis

To make investment decisions and analyze securities, methods that fall into two very broad categories are used - the technical and fundamental analysis. While the fundamental analysis examines the characteristics of a company to establish its value, the technical analysis adopts a different approach. It does not concern itself with the value of a commodity or a company. The price movement of the market is the only matter that interest the technicians.

Technical analysis just studies the demand and the supply in a market, attempting to determine what trends will continue in the future. By studying the market itself, the technical analysis attempts to understand the market trends, not its components. Understanding the benefits and the limitations of a technical analysis gives you a set of skills and tools, enabling you to become a better investor or trader.

While there are known to exist many investment styles on the fundamental side, many different types of technical traders exist, too.

Some employ technical indicators, others oscillators or chart patterns, but most use a combination of all. What separates the technical analysis from the rest is the exclusive use of volume data and historical price. Technical analysis does not concern itself with the information such as the stock undervaluation, for example. The point that is taken into account is the past trading data of the security and the type of information it can provide about the future movement of the security.

The assumptions of the technical analysis are based on:

1. Everything is discounted by the market.
2. Price moves in trends.
3. History repeats itself.

For any security that has historical trading data, the technical analysis may be applied. Futures, stocks, fixed income securities, commodities, and Forex are included here. Most of all, technical analysis is used with Forex and commodities for which traders are the predominant participants.