What is technical analysis?
Technical Analysis is a methodology that uses historical asset prices, in conjunction with behavioural economics and quantitative analysis, to try and forecast future prices.
The key assumption in technical analysis is that the price of an asset reflects all available information. By making that assumption, a pure technical analyst is confident that they can predict future market behaviour purely from studying historical prices.
Such an analyst believes that there is nothing to gain in looking at company financials or macro factors since they are already baked into the asset price. The general belief is that prices move in trends, which repeat over time.
This view contrasts with fundamental analysis, which is underpinned by the belief that an asset price is either overpriced or underpriced, based on its intrinsic value. The intrinsic value is determined by a detailed study of the status and health of the company, using its reported financial statements (balance sheet, income statement and cash flow statement).
Technical analysis can be broadly divided into indicators and patterns.
Technical indicators are calculations done using the asset price, which aim to show whether an asset price is likely to rise or fall.
Technical Indicator examples:
Patterns are more subjective and involve charting the asset price history and looking for various shapes and structures that might indicate where the price is headed.