Technical analysis is a method of evaluating statistical trends in trading activity, typically involving price movement and volume. It is used to identify trading and investment opportunities. Unlike fundamental analysis, which attempts to evaluate a security's value based on financial information such as sales and earnings, technical analysis focuses on price and volume to draw conclusions about future price movements.

Understanding Technical Analysis

Technical analysis is used to scrutinize the ways supply and demand for a security affect changes in price, volume, and implied volatility. It assumes that past trading activity and price changes of a security can be valuable indicators of the security's future price movements when paired with appropriate investing or trading rules.Technical analysis' various charting tools are often used to generate short-term trading signals. They can also help improve the evaluation of a security's strength or weakness relative to the broader market or one of its sectors. This information helps analysts improve their overall valuation estimate.Technical analysis as we know it today was first introduced by Charles Dow as the Dow Theory in the late 1800s. Several noteworthy researchers including William P. Hamilton, Robert Rhea, Edson Gould, and John Magee further contributed to Dow Theory concepts. Nowadays, technical analysis has evolved to include hundreds of patterns and signals developed through years of research.

Why Is Technical Analysis Important?

Professional analysts often use technical analysis in conjunction with other forms of research. Retail traders may make decisions based solely on the price charts of a security and similar statistics. But practicing equity analysts rarely limit their research to fundamental or technical analysis alone.Technical analysis can be applied to any security with historical trading data. This includes stocks, futures, commodities, fixed-income securities, currencies, and more. In fact, technical analysis is prevalent in commodities and forex markets where traders focus on short-term price movements.

The Bottom Line

Technical analysis is a longstanding method of analyzing the price and volume data of securities to determine future price action. This data usually appears on charts. Investors and professional traders apply a variety of technical indicators to these price and volume charts to draw conclusions and make decisions about entry and exit points for trades.