What is a technical analysis

Technical analysis is a stock picking method that involves the study of price/volume charts of prospective stocks. Technical analyst also makes use of various statistical indicators.

Technical analysts believe that the price of a stock is determined by the demand and supply of that stock, and that by studying past price and volume data on a stock’s chart they can predict the future price movement of that stock. Technical analysts disregard the analysis of the fundamental data- financial statements and such- of a company. They believe that stock prices already reflect that information and therefore the only study price charts. Technical analysts also believe prices move in trends and spend a lot of time trying to identify trends and patterns so as to be able to predict price movements.

Technical analysts typically make use of four types of charts. Line charts, bar charts, point and figure charts and candlestick charts. Line charts being the most basic, only display the periodic closing price of a stock, these price points are connected by a line. Bar charts display both the periodic high and low price and closing price, with a vertical line connecting the high and low price points and a cross mark representing the closing price. Point and figure charts, record only significant price movements. With an X signifying a specific price movement upwards and an O signifying a specific price movement downwards. Candle stick charts closely resemble bar charts, but they also tell whether a stock as advanced or declined in a particular period. A white bar candle stick represents an advance, while a dark bar candlestick represents a decline.
Aside from charts, technical analyst also makes use of numerous statistical indicators. These indicators are measures of economic and non-economic activity and they are used to help determine the direction of stock price and stock market movements. Popular indicators include, advance decline index, relative strength ratio, and moving averages.