Technical Analysis Basics

What is Technical Analysis?

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.

Think of technical analysis like weather forecasting - we use past patterns to predict future conditions, but it's never 100% certain.

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.

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

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.) |

Technical analysis is a tool, not a crystal ball. Always use stop-losses and never risk more than you can afford to lose.

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