What is technical analysis?

Views 29KAug 9, 2023

Core points

  • Technical analysis predicts the future market trend by analyzing historical market data.

  • Technical analysis is based on the following three assumptions: the market covers all information, prices evolve in a trend, and history repeats itself.

  • Investors can use fundamental analysis to select stocks and technical analysis to determine the timing of buying and selling.

Detailed explanation of concept

Technical analysis of this investment strategy, through the study of historical transaction data (mainly prices and volumes), to predict the future price trend. Technical analysis can be applied to stock, futures, commodities, fixed income and other securities markets.

The method of technical analysis originates from the observation of price movements in financial markets over the past hundred years. The modern technical analysis theory we know today is mainly based on the Dow theory, which was founded by Charles Dow, the founder of Dow Jones.

In recent centuries, more technical analysis tools and theories have emerged. When using technical analysis, people pay more and more attention to the application of computer technology.

The hypothesis of technical analysis

Technical analysis is based on three basic assumptions:

1. Market behavior covers all information

Technical analysts believe that the price of securities already reflects all available public information, including the company's fundamentals and macroeconomic conditions.

2. The price evolves in the way of trend

Technology traders believe that price movements will show a certain pattern or trend.

3. History often repeats itself

The repetition of price movements is usually attributed to investor psychology, as investors tend to behave similarly in fear or excitement.

Tools for technical analysis

With the development of the times, technology traders have developed more and more trend patterns and technical signals, which make technical analysis more and more practical and systematic.

In general, technical analysts focus on the following types of metrics:

  • Price trend

  • Chart form

  • Volume and momentum indicators

  • Oscillation index

  • Moving average

  • Support level and resistance level

People usually do not use the above single indicator alone, but use a combination of multiple indicators to identify the appropriate buying and selling points.

Technical analysis and fundamental analysis

Fundamental analysis and technical analysis are generally regarded as two different investment styles: fundamental analysts try to calculate the intrinsic value of a company by studying aspects such as macro-economy, industry conditions and corporate finance. However, technical analysts tend to measure the short-term supply and demand of stocks by observing the historical data of stock prices and trading volumes.

Fundamental analysis studies the company's income, expenses, assets, liabilities and other financial data. In addition, fundamental analysis also uses a variety of fundamental indicators, such as return on equity (ROE), price-to-earnings ratio (P / E), asset-liability ratio and so on. Technical analysis uses chart information such as K chart, price pattern, trading volume and so on. In addition, various technical indicators, such as MA, MACD, RSI, etc., are also widely used by traders.

In general, fundamental analysis applies to long-term investments, using data that spans several years. In contrast, technical analysis can be used within a time frame of months, weeks, days or even minutes, with more flexibility in analyzing short-term market movements.

You may have heard that value investors usually use fundamental analysis, while only speculators use technical analysis. This is a complete misunderstanding. In fact, in the actual market trading, many professional traders use the two together. Fundamental analysis is usually used to select stocks, while technical analysis is used to find the right time to buy and sell.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.