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Technical Analysis: What You Need to Know
Written by The Content Team | Published on September 25, 2018
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Q: What is technical analysis?
A: Investors use a variety of measures to decide whether or not to buy or sell stock at a particular time. These can be anything from a media report or a discussion with a friend to public data or analyst ratings. One way to evaluate the potential price path of a stock is technical analysis, which — as you might guess — involves analyzing certain data points to determine if a stock price is likely to move up or down.
Price Movements
The most common data point used in technical analysis is price; more specifically, historical changes in price over time. Proponents of technical analysis believe that by tracking and analyzing price changes over time, they can forecast price movements. This is based on the premise that price changes are not arbitrary but follow patterns that can be discerned through close study of historical data. Technical analysts believe that human action moves stock prices and that human action repeats in patterns over time.
It's more complicated than simply tracking prices. Technical analysts chart specific price indicators and use them to find trends. The data might include percentage change, moving averages, momentum or maximum price vs. minimum price. Once these data points are gathered and charted, analysts can then examine and manipulate them to tease out trend theories.
Trading Volume
Technical analysts also use historical trading activity to help determine trends. Combining trading volume and price helps clarify the supply-and-demand picture of a specific security. The relative importance of a stock-price change is better determined when trading volume is also taken into consideration. For example, if a stock price jumps dramatically in a day, but trading volume doesn't, it could indicate that the jump wasn't the start of a trend shift. But if both jump, then technical analysts may consider it a potential indicator that the previous trendline is shifting.
Not About Valuation
Technical analysis is not a study of the intrinsic value of a company or, frankly, of the company at all. Those who evaluate securities using technical analysis are not interested in valuing a business based on company fundamentals, financial data such as earnings or cash flow, or the quality of the management team. Price movements and trading volume are the key elements of technical analysis.
Read more about technical analysis in How to use Technical Analysis Research.
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