Knowledge Centre

Technical Analysis: Simple tool that studies market factors that influence stock price

Updated on 17 January 2018

Technical analysis is the study of stock charts. The belief is that via technical analysis or study of the past action/climate of the market, one can determine the future price trends.

It is among the main two methods largely used for securities analysis needed for investment decision-making.

At the core level, technical analysis scales supply and demand equation of the market to foresee price trends. While fundamental analysis focuses on analyzing fundamental attributes of the security, technical analysis focuses on the driving factors inside the market behind price rise and dips.

In depth research and analysis

Several sources refer to technical analysis as a trading tool that many analysts use to evaluate securities and predict their future movement through statistical analysis. These statistics are information regarding the previous trading activity like price movement, volume etc.

A belief that technical analysts accept is that factors like security’s past trading activity and changes in its price are factors that can give you an insight into the likely future price movements.

Technical analysis evolved out of numerous fundamental concepts that Dow Theory introduced. Two primary assumptions of Dow Theory that inspire technical analysis largely involve:

  • Market price reduces every factor that influences security's price
  • Market price movements often follow identifiable patterns and trends that may even grow repetitive so the movements are not random

Based on the assumption that price discounts all, it’s safe to state that a security’s market price accurately reflects all available information at any time. Thus, it is the true factor that reflects fair value of the security. This assumption revolves around the idea that market price shows the aggregate knowledge of all of the market participants.

The second assumption in technical analysis is that price changes can be identified, predicted based on the past available information. They can be foreseen in the short term and long term through which market traders can profit following informed decisions to optimize benefit.

Any tradable commodity that gets influenced by supply and demand can be studied through technical analysis. These may include futures, stocks, bonds, and currency pairs. While technical analysis is routinely used for observing and foreseeing price changes, experts often use it for tracking trading volume and other purposes than price changes.

Experts over the years have coined an array of technical indicators to improve their accuracy of market price movement predictions. These indicators concentrate on classifying existing market trends which are influenced by support and resistance. Other indicators focus on identifying how strong the ongoing trends are, how long they may continue, etc. Experts regularly put trendiness, moving averages, and other momentum indicators to use.

These indicators are used on differing timeframes by short term and long term traders. They may be used on one-minute timeframes charts, one or four-hour timeframes charts, daily, weekly, monthly, quarterly charts, etc.

Price and time are the two factors of a stock chart and this chart illustrates the price movement of a stock over time. Individual data plots using daily closing price, individual price bars, etc are created by analysts to visually represent the trends.