Technical analysis is a trading discipline used to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Unlike fundamental analysis, which focuses on a company's financial health, technical analysis centers on the study of supply and demand as reflected in market price movements.
Practitioners use charts to identify patterns and trends that may suggest future price direction. Common tools include moving averages, support and resistance levels, and oscillators like the Relative Strength Index. These indicators help traders determine entry and exit points based on historical data rather than intrinsic value. For example, a trader might look for a breakout when a stock price crosses above a 50-day moving average, which is a common metric for assessing momentum.
Technical analysis operates on the core belief that historical price patterns tend to repeat due to collective market psychology. However, past performance does not guarantee future results. All forms of trading involve significant risk, and technical indicators can provide false signals. Traders often combine these methods with risk management strategies, such as stop-loss orders, to mitigate potential capital loss.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.