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What Is Technical Analysis?

Views 2952022.06.08

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Key takeaways

  • Technical analysis seeks to predict future market behavior by examining historical market data.

  • Technical analysis operates under three assumptions: the market discounts everything, price moves in trends, and history tends to repeat itself.

  • Traders typically use fundamental analysis to pick stocks and technical analysis to time their trades. 

Understanding technical analysis

Technical analysis is a strategy used to predict future stock prices by studying historical trading data— primarily price and volume. This technique can be applied to a number of securities, including stocks, futures, commodities, and fixed-income markets.

Joseph de la Vega adopted early technical analysis techniques as far back as the 17th century to predict Dutch markets. However, the technical analysis theory as we know it was first introduced by Charles Dow in the late 1800s with the Dow Theory.In today's trading, technical analysis uses hundreds of patterns and signals that have been developed through years of insight and research.

Assumptions of technical analysis

Technical analysis is based on three underlying assumptions: 

1. The market discounts everything

Technical analysts believe that a security's price already reflects all publicly available information, including the company's fundamentals and broad market factors.

2. Price moves in trends

From technical traders' perspectives, the price movement will exhibit certain trends and patterns.

3. History tends to repeat itself

The repetitive characteristic of price movements is often attributed to market psychology as investors tend to act similarly in fear or excitement. 

Technical analysis tools

Hundreds of patterns and signals have been developed through years, making technical analysis more practical and systematic.

In general, technical analysts look at the following broad types of indicators:

  • Price trends

  • Chart patterns

  • Volume and momentum indicators

  • Oscillators

  • Moving averages

  • Support and resistance levels

The technical indicators listed above are usually used in combination to recognize the potential trading opportunities. 

Technical analysis vs. fundamental analysis

Fundamental analysis and technical analysis are commonly recognized as two different investing styles: 

Fundamental analysts seek to figure out the stock's intrinsic value by studying everything from the overall economy and industry conditions to companies' financial state and management. On the other hand, technical analysts try to evaluate the demand and supply of securities and focus on the historical data of stocks' price and volume.

Fundamental analysis studies financial data (revenues, expenses, assets, liabilities, etc.) and analyzes fundamental indicators such as Return on Equity, Price/Earnings ratio, and Debt/Asset ratio. Meanwhile, technical analysis may look into charts as well as numerous technical indicators such as moving average (MA), rate of change (ROC), moving average convergence divergence (MACD). 

Fundamental analysis is more suitable for long-term investments, while technical analysis predicts short-term market movements better.

You may have heard that value investors commonly use fundamental analysis while only speculators use technical analysis. This is a complete misconception.

As a matter of fact, in actual market trading, many professional traders use the two together. Fundamental analysis is usually used to pick stocks, whereas technical analysis is used to find a good, low-risk entry or exit point.

The content in this article is intended for general circulation and informational purposes only. It does not take into account the investment objectives, financial situation or needs of any particular person and should not be relied on as advice or recommendation. Information provided in this article are not specifically intended for or specially targeted at the public in any specific jurisdiction. Neither Moomoo Inc. nor its affiliates are licensed Financial Advisers and do not provide financial advice. You are advised to consult your financial adviser before making any commitment to invest in any capital markets product. The information published is not and does not constitute or form part of any offer, invitation or solicitation to subscribe or to enter into any transaction in capital markets products. Moomoo is a professional trading app offered by Moomoo Inc. In the U.S., investment products and services on Moomoo are offered by Futu Inc., Member FINRA/SIPC. In Singapore investment products and services are offered through Futu Singapore Pte. Ltd., regulated by the Monetary Authority of Singapore (MAS). This advertisement has not been reviewed by the MAS. Moomoo Inc., Futu Inc. and Futu Singapore Pte. Ltd are affiliated companies. Any illustrations, scenarios, or specific securities referenced herein are strictly for illustrative purposes. Past investment performance does not guarantee future results. Investing involves risk and the potential to lose principal.

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