Technical Analysis can be defined as an art and science of forecasting future prices based on an examination of the past price movements. This is different from how fundamental analysis of is done. Technical analysis is not astrology for predicting prices. Technical analysis is based on analyzing current demand-supply of commodities, stocks, indices, futures or any tradable instrument.
Technical analysis involves putting stock information like prices, volumes and open interest on a chart and applying various patterns and indicators to it in order to assess the future price movements. The time frame in which technical analysis is applied may range from intraday (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price data to many years.
There are essentially two methods of analyzing investment opportunities in the security market viz fundamental analysis and technical analysis. You can use fundamental information like financial and non-financial aspects of the company or technical information which ignores fundamentals and focuses on actual price movements.
Basis of Technical Analysis
What makes Technical Analysis an effective tool to analyze price behaviour is explained by the following theories given by Charles Dow:
- Price discounts everything
- Price movements are not totally random
- What is more important than why
Also read: What is Efficient Market Hypothesis?