Technical analysis is a business discipline used to evaluate investments and identify trading opportunities in the price trends and patterns seen on the charts. It is a trading technique that investors use to discover new investment opportunities. Technical analysis focuses on market action, specifically volume and price. It is just one approach to analyzing stocks, and when considering which stocks to buy or sell, you should use whichever approach you are most comfortable with.
As with all your investments, you must determine for yourself whether investing in a particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Most technical analysts use some combination of tools to recognize potential entry and exit points for trades. In this sense, technical analysis is similar to fundamental analysis, which has specific rules for calculating ratios, but it introduces greater subjectivity in the evaluation phase. Second, technical analysis assumes that asset prices, even if random, will form a pattern and a trend regardless of the time frame that is observed and analyzed.
Technical analysis aims to predict future prices by analyzing past data, while fundamental analysis determines whether a stock is undervalued or overvalued by analyzing the company's fundamental factors. For example, investors who use fundamental analysis can use charts on a weekly or monthly scale, since longer periods allow for periods of consolidation and trend.
Supportand resistance indicators are a crucial aspect of technical analysis and refer to price levels when market prices have difficulty crossing a level and breaking through. Charles Dow, an American financial journalist responsible for the Dow theory, formulated a basis for technical analysis.
Volume is also a crucial aspect of technical analysis, since it can be considered an indicator of the buyer's and seller's conviction to influence prices. Technical indicators are generally used to obtain additional information in combination with basic chart patterns, which are placed on top of chart data to predict where prices might be heading. Graphical and technical indicators become more reliable when the time scale is extended to longer periods.