What is Technical Analysis?
Technical analysis is a method of forecasting the direction of financial market prices through the evaluation of historic price and, where available, volume data.
A basic premise of the technical approach is that market action discounts everything: all that is known, or can be known, is ‘in the price’. Technical analysis is therefore not concerned with the underlying value of a security, but with the effects on the price of that security produced by the activities of market participants.
A wide range of techniques may be applied to this assessment of price action, including the study of repetitive patterns on charts, mathematical calculations to determine the speed and momentum of a move, and statistical tools to identify extreme conditions.
Behavioural Finance and Technical Analysis
Behavioural finance studies the effect of social, cognitive, and emotional factors on people’s economic decisions. It helps us better understand investors’ behaviour and shines a light on why and how markets behave the way they do. By understanding human behaviour and the psychology of the market, you can start improving your own actions as a technical analyst, and improve the quality of your output.
The STA runs a comprehensive education programme, gives monthly lectures (also available via video links), publishes its journal three times a year and offers its members access to an extensive library. All the educational courses and examinations are accredited by IFTA, the International Federation of Technical Analysts.
Click here to view our current education brochure.
The Roots of Technical Analysis
It is possible that technical analysis is the oldest form of financial analysis in the world. Several centuries ago in the corn markets of England and the rice markets of Japan, traders developed a method of recording transactions that would enable them to see at a glance how much people had been paying for the product. With the help of that information they were able to assess where supply and demand were in balance and thus see better what price they should agree for their future transactions. The form that this monitoring took was a series of markings on the page at different levels to represent prices as they rose and fell. The result was something very close to a modern “Point & Figure” chart.
In contrast fundamental analysis attempts to estimate the value of a currency, a share or an entire equity or bond market based on profitability, management or economic strength, and future prospects. This assumes that value is the sole determinant of price, but in fact price and perceived value are rarely in equilibrium. Prices are set by supply and demand, and they represent all that is known, feared, and hoped for by the market as a whole and its individual participants. So fundamental analysis focuses on value, but technical analysis concerns itself with price, in conjunction with volume of transactions and individual/group psychology. Part of this discipline involves the charting of historic prices, part is concerned with the statistical analysis of price and volume time series and part with the examination of the psychological state of a market in the continuous battle between fear and greed.