> **Definition**
>
> Technical analysis is a method of predicting future price movements of securities by analyzing historical market data, primarily price and volume.

## What Is Technical Analysis?

Technical analysis uses historical market data to predict future price movements.

Traders are helped in making profitable decisions by using technical analysis tools on charts to find entry and exit points for trades. They anticipate future price movements and market behavior.

The two key components of [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) are chart patterns and [technical (statistical) indicators](https://www.investopedia.com/ask/answers/122314/what-exponential-moving-average-ema-formula-and-how-ema-calculated.asp).

Market psychology and [quantitative analysis](https://www.investopedia.com/terms/q/quantitativeanalysis.asp) play roles in forming predictions in technical analysis.  
  
Technical analysis operates on one core principle: the assumption that the market reflects all available information in the price chart.

### Key Takeaways

*   Technical analysis involves using historical market data to forecast future price movements.
*   Chart patterns and technical indicators are the primary tools of technical analysis.
*   Technical analysis assumes market prices reflect all available information.
*   While powerful, technical analysis should not be solely relied upon due to its limitations.
*   Technical analysis differs from fundamental analysis, which focuses on a company’s financial health.

![Technical Analysis](https://www.investopedia.com/thmb/C-FqrNXlsJr5ubDS2_scjeOMj7U=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_technical-analysis-of-stocks-and-trends-6a4cc1cf851047c0a149f495292ef11c.jpg)

*Technical analysts think prices follow trends and that market psychology often repeats history. — Jessica Olah / Investopedia*

## Key Concepts in Technical Analysis

Technical analysis covers various strategies that rely on interpreting a stock's price action. Most technical analysis is focused on determining whether or not a current trend will continue and, if not, when it will reverse.

Some technical analysts prefer [trendlines](https://www.investopedia.com/terms/t/trendline.asp), while others use candlestick formations, or bands and boxes. Most technical analysts use some combination of tools to recognize potential entry and exit points for trades. A chart formation may indicate an entry point for a short seller, for example, but the trader will look at moving averages for different time periods to confirm that a breakdown is likely.

## The Evolution of Technical Analysis

The technical analysis of stocks and trends has been used for hundreds of years. In Europe, Joseph de la Vega adopted early technical analysis techniques to predict Dutch markets in the 17th century. In its modern form, however, technical analysis owes heavily to [Charles Dow](https://www.investopedia.com/articles/financial-theory/08/charles-dow.asp), William P. Hamilton, Robert Rhea, Edson Gould, and [many others](https://www.investopedia.com/articles/financial-theory/10/pioneers-technical-analysis.asp)—including a ballroom dancer named Nicolas Darvas.

They viewed the market as a tide measured by chart highs and lows, not company details. The diverse collection of theories from early technical analysts were brought together and formalized in 1948 with the publishing of "Technical Analysis of Stock Trends" by Robert D. Edwards and John Magee.

Japanese merchants used candlestick patterns to spot trading trends for their rice harvests. Studying these ancient patterns became popular in the 1990s in the United States with the advent of internet day trading. Investors analyzed historical stock charts eager to discover new patterns for use when recommending trades. Candlestick reversal patterns in particular are critically important for investors to identify, and there are several other commonly used candlestick charting patterns. The [doji](https://www.investopedia.com/terms/d/doji.asp) and the engulfing pattern are all used to predict an imminent bearish reversal.

> **Warning**
>
> Technical analysis uses historical market behavior to anticipate future movements. While it can often be effective, past performance is no guarantee of future results, and traders should be careful not to over-rely on any one analytical tool.

## Applying Technical Analysis to Trading

The main idea of technical analysis is that market prices include all available information. As a result, there's no need to look at economic, fundamental, or new developments since they're already priced into a given security. Technical analysts think prices follow trends and that market psychology often repeats history. The two major types of technical analysis are chart patterns and technical (statistical) indicators.

[Chart patterns](https://www.investopedia.com/terms/p/pattern.asp) are a subjective form of technical analysis where technicians attempt to identify areas of [support](https://www.investopedia.com/terms/s/support.asp) and [resistance](https://www.investopedia.com/terms/r/resistance.asp) on a chart by looking at specific patterns. These patterns, underpinned by psychological factors, are designed to predict where prices are headed, following a breakout or breakdown from a specific price point and time. For example, an [ascending triangle](https://www.investopedia.com/terms/a/ascendingtriangle.asp) chart pattern is a bullish chart pattern that shows a key area of resistance. A breakout from this resistance could lead to a significant, high-volume move higher.

[Technical indicators](https://www.investopedia.com/terms/t/technicalindicator.asp) are a statistical form of technical analysis where technicians apply various mathematical formulas to prices and volumes. The most common technical indicators are moving averages, which smooth price data to help make it easier to spot trends. More complex technical indicators include the [moving average convergence divergence (MACD)](https://www.investopedia.com/terms/m/macd.asp), which looks at the interplay between several moving averages. Many trading systems are based on technical indicators since they can be quantitatively calculated.

## Comparing Technical Analysis and Fundamental Analysis

[Fundamental analysis](https://www.investopedia.com/terms/f/fundamentalanalysis.asp) and technical analysis are the two big factions in finance. Whereas technical analysts believe the best approach is to follow the trend as it forms through market action, fundamental analysts believe the market often overlooks value. Fundamental analysts will ignore chart trends in favor of digging through the balance sheet and the market profile of a company in search of intrinsic value not currently reflected in the price.

Many successful investors use fundamental or technical analysis, or even combine both. Overall, technical analysis supports faster trades, while fundamental analysis involves longer decisions and holding periods due to more detailed checks.

## Challenges in Technical Analysis

Like any strategy based on trade triggers, technical analysis has limitations. The chart can be misinterpreted. The formation may be predicated on low volume. The periods being used for the moving averages may be too long or too short for the type of trade you are looking to make. Apart from these, technical analysis has its own unique limitation.

As more technical analysis strategies, tools, and techniques become widely adopted, these have a material impact on the price action. For example, are those [three black crows](https://www.investopedia.com/terms/t/three_black_crows.asp) forming because the priced-in information is justifying a bearish reversal or because traders universally agree that they should be followed by a bearish reversal and bring that about by taking up short positions? While intriguing, true technical analysts focus on whether their trading model works, not the reason for price changes.

## Resources for Expanding Technical Analysis Skills

Investopedia has several articles and tutorials on the topic of technical analysis. Follow the links to articles in this journey on the menu bar to the left of this page. In addition, for further reading, you may want to check out the following:

*   [Technical Analysis Strategies for Beginners](https://www.investopedia.com/articles/active-trading/102914/technical-analysis-strategies-beginners.asp)
*   [Best Ways to Learn Technical Analysis](https://www.investopedia.com/trading/best-ways-learn-technical-analysis/)
*   [Top 7 Books to Learn Technical Analysis](https://www.investopedia.com/articles/personal-finance/090916/top-5-books-learn-technical-analysis.asp)
*   [Introduction to Technical Analysis Price Patterns](https://www.investopedia.com/articles/technical/112601.asp)
*   [Fundamental vs. Technical Analysis: What's the Difference?](https://www.investopedia.com/ask/answers/difference-between-fundamental-and-technical-analysis/)
*   [Debunking 8 Myths About Technical Analysis](https://www.investopedia.com/articles/active-trading/062215/debunking-8-myths-about-technical-analysis.asp)
*   [Is Technical Analysis a Self-Fulfilling Prophecy?](https://www.investopedia.com/ask/answers/05/selffulfillingprophecy.asp)
*   [Top Technical Analysis Tools for Traders](https://www.investopedia.com/articles/active-trading/121014/best-technical-analysis-trading-software.asp)

## What Is the Best Technical Indicator?

While there is no "best" technical analysis tool, the most popular indicators are [moving averages](https://www.investopedia.com/terms/m/movingaverage.asp). These lines represent the average price of an asset over several trading sessions, without the noise of daily price movements. By comparing longer-term moving averages with shorter-term ones, traders can anticipate changes in market sentiment.

## How Does Technical Analysis Work?

Technical analysis is premised on the belief that most traders will behave in predictable ways, due to herd dynamics and group psychology. For example, many traders will tend to exit a position after a sharp drop in market price, or to take profits when the asset gains a certain level. Since all traders have access to the same market information, and many of them are using the same technical analysis tools, there is also an element of self-fulfillment in technical predictions.

## What Does Technical Analysis Look for?

Technical analysis examines volume and price movements to predict the behavior of other traders in the market. Because these trades cause price movements, technical analysts hope to predict future price movements based on current market behavior.

## The Bottom Line

Technical analysis is a method that uses historical market data, such as price and volume, to predict future movements.

Commonly used technical analysis techniques are chart patterns and technical indicators, which help traders identify potential trade entry and exit points.

The belief that market psychology often repeats history plays a role in technical analysis, as does the assumption that all available information is reflected in the price.

While technical analysis uses past market data to predict future price movements, fundamental analysis measures a company's value based on its financials and other objective metrics, rather than market price trends.

Past performance, while useful, is no guarantee of future results. Also, overreliance on a single tool can be risky. Successful analysis may involve combining different tools and being mindful of self-fulfilling prophecies.

> **Article Sources**
>
> 1.  Robert D. Edwards, John Magee, and W.H.C. Bassetti. "[Technical Analysis of Stock Trends](https://books.google.com/books/about/Technical_Analysis_of_Stock_Trends.html?id=cVJmDwAAQBAJ)," Taylor & Francis, 2018.