What is technical analysis? (TA)

There should always be underlying factors that help an investor to decide whether to invest in an instrument or not. For this, we usually do technical analysis or fundamental analysis. The main difference between fundamental analysis and technical analysis (TA), is that fundamental analysis looks at underlying values, while TA looks at history, price movement, formations, patterns, and technical indicators. The person who has performed the analysis can then choose whether the instrument should be traded on the basis of these factors.

TA is often described as the historical collective behavior of all players in the market. The market is about money and emotions, as most investors have probably experienced both greed and fear. Technical analysis is, as said, just a way to put these behaviors, actions, and patterns into a system. It does in no way give a set conclusion on what will happen next. Beginners quickly reveal their experience whether they use the words "should/can" or "will" when they talk about technical price movements.


By studying historical movements, finding patterns, and what the probability is that these can happen again. You can use TA to create good models for probable new outcomes of price movements. It is thus a "tool" many actors use, which in turn means that potential outcomes have a self-fulfilling "prophecy".'

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Source: wallpaperaccess.com

As said, do not think that you are using technical analysis as a conclusion on how the instrument/stock is going to move. It is rather a way of predicting a probable/possible direction the instrument in question can take with the help of analysis of historical price movements and patterns.

The purpose of technical analysis


TA thus shows the collective movements of all participants in the market. Historical movements are therefore used as an indication of future price movement. Patterns and indicators have been shown to be correlated over many different instruments and markets. Investors who use TA are thus looking for similar "setups"  regardless of which market the instruments are in. You then get a system, where a combination of different indicators and patterns gives a certain probability of a specific outcome.  

Many people think and believe that TA is only used by traders, as they usually have a frequent approach to their positioning in financial instruments. The use of TA has been more and more popular for fundamental investors as a supplement to time their entrance and exits in the instruments they have found via their screenings.

The goal of using TA is in most cases to achieve excess return compared to just holding the instrument over time, you also reduce the risk you get by sitting in an instrument over a longer time horizon.

Strategies that deal with technical analysis can be found here.

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