Technical analysis helps understand stock charts.
Technical analysis is the field of analyzing the price charts of any financial market. Both short-term traders, day traders, and long-term investors may utilize technical analysis to inform their strategies. The field is large, with many different concepts and tools. Basic technical analysis can be accomplished on any standard price chart, including free charts from financial services' websites. More complex analysis requires specialized tools found in trading software.
Purpose
Technical analysis is primarily the study of price action. This contrasts with fundamental analysis, which studies a company's balance sheet and business model for investment decisions. Traders who rely on technical analysis may know little to nothing about an actual company and instead find opportunities based solely from reading charts. The end goal is the same in both forms of analysis, however. The purpose is to identify stocks with good odds for price prediction.
Chart Patterns
Basic technical analysis requires no tools other than a standard price chart. By studying the chart and looking for common patterns, a trader can learn a lot about past, current and potential future market behavior. Typical patterns that anyone can see include "double tops" and "double bottoms" where prices put in two consecutive highs or lows that are at nearly the same level. Other patterns can be more challenging to spot, such as the "cup and handle" which is based on a curved decline and rise with no clear "V"-shaped low, followed by a sharp drop that may precede a price rally. Dozens of these patterns exist and technicians learn to recognize them quickly.
Support and Resistance
The chart patterns of "support" and "resistance" are also easy to identify, and these mechanisms are at work in a lot of technical analysis. "Support" is a price point below which prices are unable to penetrate while "resistance" is a level that continuously acts as a ceiling that halt price rallies. If you can draw a horizontal line across the edges of price action over a period of time, then support or resistance is at play. These patterns occur due to the auction process. If many participants in a market buy into a stock and it immediately declines, these traders will seek to sell the stock and break-even if it returns to their purchase price. This wave of selling overwhelms buyers and causes resistance to appear.
Moving Averages
While studying raw price action is an integral part of trading, most traders employ the use of technical indicators to help further understand price action. There are thousands of technical analysis indicators and each is based on a formula that evaluates past price action for the purpose of predicting future activity. Moving averages are among the most popular and easy to understand. These indicators simply average a certain number of price bars in the past and plot a point over the current bar. These points are connected to create a moving average line. A rising line means that an up trend may be in play.
Oscillators
Technical oscillators are complex formulas that display results in a sub-graph below the price chart. They are widely followed and many different oscillators exist. The "MACD" oscillator is a popular indicator that charts the difference between two moving averages as a single line below the price chart. This indicator can quickly display changes in price momentum as the two moving averages get further apart due to sudden movements in price action.
