Technical analysis is the study of past market action to try to gauge what the market might do in the future. At its most basic, it is the study of price. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes an entirely different approach; it doesn't care about the "value" of a company. Technical analysis is only interested in the price movements in the market.
Technical analysis philosophy
There are three basic tenets that technical analysis is built from:
Market action discounts everythingAll known information related to the security is reflected in the price of the stock. This includes fundamental factors. As soon as new information comes to light it is immediately included in the price.
Prices move in trendsIn technical analysis prices of securities tend to move in observable trends with a tendency to stay in the trend. The trend is considered to be intact until the trend line is broken. After a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. This is where the old adage “the trend is your friend” comes from, meaning you should trade in the same direction as the trend.
History repeats itselfTechnical analysis is the study of what has happened to the price of a security in the past with the expectation that history tends to repeat itself. Many of the charts patterns in technical analysis have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves. The repetitive nature of price movements is attributed to market psychology.
When you take away all the bells and whistles of technical analysis it is basically a study of supply and demand. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that may help enable you to be a better trader or investor. Keep in mind that technical analysis is performed by humans, it’s not an exact science, and as such, is not perfect.
Technical analysis only focuses on market action. Technical analysis is only one approach to analyzing stocks. When considering what stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments, you must make your own determination whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.