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Technical analysis definition

By Zoran Temelkov

An assessment tool used for evaluation of financial instruments and identification of investment opportunities based on historical data.

Technical analysis meaning

This type of analysis considers historical data, looking for patterns in the movements of the price in the past. It also accounts for the traded volume of the securities. It can be used on any types of financial instrument (stock, bonds, commodities) as long as historical data on it exists.

Technical analysis is often used for short-term investments, because it doesn't consider the future outlook of the company's potential. It is based on the past performance of a stock. Technical analysis can be practical for those executing a day-to-day strategy or intraday investors. It is conducted using statistical methods and charts through which the patterns can be determined.

What is technical analysis?

Technical analysis is based on the assumptions that:

  • All relevant information is already incorporated in the prices;
  • Supply and demand define market value;
  • Past performance is an indicator for predicting future price movements;
  • Hidden patterns and trends can be identified in past performance.
  • Investors' sentiment can be predicted;
  • Trends in market behaviour exist;
  • A repetition in investors' behaviour exists for a specific financial instrument.

Types and indicators of technical analysis

Because of its nature, and the way this analysis is performed, there is a plethora of different types of technical analyses. First and foremost, the analyst can use different types of charts, such as a bar chart, line chart or candlestick chart. The charts show the price movements in different time intervals — one minute, five minutes, hourly, daily, weekly, monthly, or yearly.

Aside from the charts, analysis uses different types of indicators. A trend line is used to find trends in the past prices of a stock. Fibonacci retracement is an indicator which can be used for finding the support and resistance levels. There are a variety of other indicators available when doing technical analysis.

All of the aforementioned components of technical analysis are used in the process of developing an investment strategy. They can be practical for identifying patterns and repetitive trends in the movements of a stock's price, or the price of other instruments.

Technical analysis vs fundamental analysis

Unlike the technical analysis, the fundamental analysis is an in-depth analysis. It is evaluating an investment decision on the basis of the company's financial statements, industry, competition, future prospects, etc. It is more expensive to perform, but it can help in the process of assessing the real value of a company or an investment.

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