What is Technical Analysis?
Lesson 1 of 85 min5 exercises
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Understanding Technical Analysis
Technical analysis is the study of past market data, primarily price and volume, to forecast future price movements. Unlike fundamental analysis, which looks at a company's financials, technical analysis focuses purely on chart patterns and indicators.
Tip
Think of technical analysis like weather forecasting - we use past patterns to predict future conditions, but it's never 100% certain.
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The Three Core Principles
1. Price Discounts Everything: All known information (news, earnings, sentiment) is already reflected in the price.
2. Prices Move in Trends: Markets don't move randomly - they trend up, down, or sideways.
3. History Repeats Itself: Chart patterns that worked in the past tend to work again because human psychology doesn't change.
2. Prices Move in Trends: Markets don't move randomly - they trend up, down, or sideways.
3. History Repeats Itself: Chart patterns that worked in the past tend to work again because human psychology doesn't change.
Example
When GME started its famous run in January 2021, technical analysts spotted a "cup and handle" pattern forming weeks before. Those who understood this pattern had an edge.
Pattern recognition is a key skill in TA
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Technical vs Fundamental Analysis
| Technical Analysis | Fundamental Analysis |
|---|---|
| Studies price charts | Studies financial statements |
| Short to medium term | Long term |
| "When to buy" | "What to buy" |
| Uses indicators | Uses ratios (P/E, etc.) |
Watch out
Technical analysis is a tool, not a crystal ball. Always use stop-losses and never risk more than you can afford to lose.
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Key takeaways
- Technical analysis studies price and volume to predict future movements
- Three principles: price discounts everything, trends exist, history repeats
- TA focuses on "when to buy" while fundamental analysis focuses on "what to buy"
- No analysis method is 100% accurate - always manage risk
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