What is technical analysis?
Technical analysis is one of the two main methods for analysing markets and choosing investment strategies; the other is fundamental analysis.
Technical analysis analyses past market performance by looking at the chart activity of price movements, volume, moving averages and the statistics of various outcomes. On the other hand, fundamental analysis looks at a company’s financial statements to work out the company’s value.
Think of technical analysis as like looking at a huge graph showing years of market data, and fundamental analysis as zooming in on individual businesses.
Where have you heard about technical analysis?
John J Murphy’s Technical Analysis of the Financial Market is one of the most well-known investment reference books out there. You may have also heard of ‘chartists’, another term used for advocates of technical analysis, the name comes from the fact technicians use a lot of charts to explain their analysis.
What you need to know about technical analysis...
There is a long-standing rivalry between the two main schools of market analysis.
Chartists think that looking at a company’s published financials is irrelevant, as you can find out more from a company’s stock quote. Critics of technical analysis, meanwhile, say that results are affected by an analyst’s bias and are too open to interpretation.
Only recently has technical analysis become more widely accepted. Investment banks still rely on fundamental analysis, but will normally refer to technical insight too.