What is Technical Analysis?

One way to evaluate the potential price path of a stock is technical analysis, which — as you might guess — involves analyzing certain technical data points to determine if a stock price is likely to move up or down.

Technical analysis is based on analyzing a company's trading history. This approach forecasts future price movements and trends by examining past price movements, market activity, prices and volume traded.

This type of analysis can be valuable when considering when to make a trade or investment decision, especially when used with other sources of research. 

Here are four key things to know about technical analysis:

1. It's not about valuation

Technical analysis is not a study of the intrinsic, or true, value of a company. In fact, it's not about the company at all. Price movements and trading volume are the key elements of technical analysis, not company fundamentals such as earnings and cash flow or the quality of the management team.

Technical analysis focuses on the stock market. Technical analysts believe the market price already reflects the fundamentals of any given stock, and therefore those fundamentals can be ignored.

2. Price movements are key

The most common data point used in technical analysis is price. More specifically, historical changes in price over time. That's because technical analysts believe that tracking and analyzing price changes over time can help them forecast price movements.

The overall premise is that price changes are not arbitrary, but instead follow patterns that can be determined by studying historical data. Technical analysts believe that human actions move stock prices, and that human actions repeat in patterns over time.

Of course, there's more involved 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 charted, analysts then examine them to identify overall trends.

3. Trading volume helps identify trends

Historical trading volumes are also used in technical analysis to help determine trends. When past volumes are considered alongside stock-price changes, it can sometimes provide more clarity on the significance of a price change when trying to determine trends.

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 a trend is shifting.

4. Charts used to analyze patterns

Technical analysis relies on a variety of charts that analyze price and volume over time. These charts are often based on moving averages rather than all the prices a stock may have traded at over a specified period. This helps smooth out short-term fluctuations.

A simple moving average is the average of a stock's closing prices over a given period. It's called a "moving" average because the trading days in the period change for each date being graphed. For example, the average closing price for the previous five trading days, calculated for each day in January, would chart that stock's five-day moving average in January. An exponential moving average is similar, except that more recent dates are weighted more heavily.

Where to Find Technical Analysis

When you pull up a Detailed Quote on a specific stock, ETF or index you want to analyze, you'll find technical analysis information under both the Technicals and Research tabs.

To find out more about technical research and chart patterns, read How to use Technical Analysis Research and Stock Selection Strategies: Technical Analysis.

The Technical Analysis page under Research > Research Tools also offers insight into current technical events, plus a Technical Analysis Education section where you can do a deeper dive into chart patterns.