As an investor, you may be looking at what’s going on in the market right now, or looking at a particular stock, and thinking—is it a good time to buy or sell? In combination with fundamental analysis, some investors use chart analysis tools like technical indicators to help answer that question.
At Fidelity, we think earnings—the fundamentals of a company—steer stock prices over the long term. But while analysis of a company’s fundamentals can help you decide what to buy or sell, chart analysis (also known as technical analysis) can give you some clues as to when you might like to buy or sell those investments.
Technical indicators are a way of evaluating markets and investments based on trends in price and volume—in other words, the number of shares being traded at different price levels.
Why do some investors use chart analysis?
Many investors who use chart analysis share some common beliefs about how the stock market works:
Price action reflects market sentiment. The price of a stock is like an information barometer. Because information is rapidly assimilated into the current price, investors who use chart analysis take the price as a starting point.
Prices move in trends. Much of chart analysis is devoted to identifying trends, and trying to spot when the trends will change. Trends tend to continue until they run their course—just like in fashion when you look around and all of a sudden you’re the only one still wearing flared jeans.
History repeats itself. Markets are made up of people, and it’s human nature to respond predictably to certain events. When those people are investors, their behaviors are captured in stock charts and trading data. Chart analysts look at what has happened in the past, find patterns that have repeated, and extrapolate into the future when similar events occur or when they see the patterns forming again.
What are indicators?
Technical indicators are formulas that try to explain what is happening—and what might happen—with a stock or other investment. They may be able to highlight trends, hint that a trend may be changing, or tell you the strength of the momentum behind stock movements.
There are many technical indicators—some are fairly easy to understand and use, while others are more complicated and advanced.
The next three stories will look at some commonly used indicators and how you can use them.
Past performance is no guarantee of future results.
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