Technical Analysis

From Financial Literacy Wiki

Technical analysis attempts to predict future stock prices by studying past prices and other market statistics such as trading volume. Technical analysts believe that stock markets are inefficient. They believe that the inefficiency arises because investors are often moved by market psychology. In particular, investors tend to buy stocks when others are buying and selling stocks when others are selling. Such “herd behavior” builds momentum into stock prices, rendering stock prices predictable, at least in the foreseeable future. Given this belief, technical analysts have devised various tools to detect momentum in stock prices.

These tools can be broadly classified into two categories. The first category is charts of historical stock prices and volume. Technical analyst believe that far from being random, stock prices form distinct patterns that recur and these patterns can help the trader to predict future price movements. Because of their reliance on charts, this group of technical analysts are also known as chartist.

The second category of tools are the technical indicators. These numerical indicators, the purpose of which is again to signal to the trader buying and selling opportunities. Over the years, more and more technical indicators have been developed. The more popular indicators include, moving average, Relative strength index and trading range breaks.