Understanding Technical Analysis

In its purest form, technical analysis is the study of charts with the goal of determining future price actions. It shouldn't come as a surprise that talking about investing strategies brings up strong emotions among their practitioners. After all, people's money is on the line. But few topics draw the same polar degrees of ire and praise that technical analysis does.
Let's define exactly what technical analysis is. At its core, technical analysis is the study of the market itself, rather than the goods that trade in the market, in determining the investment-worthiness of an asset. Technicians are primarily concerned with price and volume and with the supply and demand factors that actually move an assets value.

Technical analysis believes that investors en masse display much of the same behavior as the investors that preceded them. "Everyone wants in on the next Microsoft," "If this stock ever gets to $50 again, I will buy it," "This company's technology will revolutionize its industry, therefore this stock will skyrocket,"--these are all examples of investors' attitudes repeating.

To a technical analyst, the human characteristics of the market might be irrational but nonetheless they exist. Because investors' attitudes often repeat, investors' actions in the marketplace often repeat as well. I.e., patterns of price movement will develop on a chart that a technical analyst believes have predictive qualities.
It is important to understand that the realm of technical analysis is not limited to charting. Technical analysis is always primarily concerned with price trends. Anything that can influence the price trend is of interest to a technical analyst.

Technical analysis is widely used among traders and financial professionals, and some studies say its use is more widespread than is "fundamental" analysis in the foreign exchange market. Several academic studies suggest that…technical analysis may well be an effective means for extracting useful information from market prices.

Barry Norman
Barry Norman is the Director of Investors Trading Academy as well as a published author and educator. Barry brings with him over 35 years of financial market knowledge and experience. He holds an MBA in Finance and Economics from UCLA and an undergraduate degree in Economics from the University of Maryland. Barry was award the title of “Best Education in Europe” by Global Banking & Finance. Barry is also a presenter for the MoneyShow and many well-known news sources.