What is technical analysis?
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Countless books have been written on the subject of technical analysis. But for those unfamiliar with the concept, technical analysis is often simply described as the study of past and present price action, expressed via charts, in order to determine the future direction of a particular financial instrument. Those who use technical analysis are referred to as technical analysts or technicians.
Technical analysts study the market itself rather than the external factors that affect price. Believing that all factors that affect prices are already captured by it, they look at what the market is doing rather than what it should be doing.
This form of analysis has been around far longer than most people think. In various forms, the study dates back hundreds of years. The Dutch used it in the 17th century, the Japanese have used Candlestick charts since the 18th century, and in the US, the writings of Charles Dow in the 19th century and RN Elliott and WD Gann in the 20th century, are legendary.
For a small minority, the technical analyst will still be seen as some form of 'crystal ball' gazer, one who reads the stars, and one who cannot be taken seriously. However, this view is slowly being eradicated and technical analysis is now widely incorporated in the investment process.
The discipline of charting or technical analysis has evolved over the years, and these days the proficient technical analyst, or market analyst as some prefer to be called, incorporate into their analysis much more than just the chart formations. Indicators are used to measure momentum, volume is studied, moving averages are used as guidance, and 'wave structure' is analysed by some. Then there is intermarket analysis, comparative analysis, psychology, and seasonal and cyclical factors - these all play an important role in the analytical process.
It is important to remember that technical analysts are as individual as any other analyst when it comes to their methods of reviewing the market. And just as fundamental analysts can review the same data and come up with a different view, so too can technical analysts. But one thing that is important is the ability for the technical analyst to relay his/her thoughts in a manner that is easily understood, and one which takes away some of the mystique commonly associated with the use of technical analysis.
For a more detailed look at technical analysis, click here.