Technical analysis involves identifying price ranges, trend momentum, and points of possible reversals via graphical representations of the math behind price movements, examining information to the second or third derivative, and using trial-and-error with formulas. Geometry, calculus, physics, and finance all play a part in this methodology.
Technical analysts use past information about price, volume, standard deviation, and other metrics, translate it into useful charting tools using mathematical formulas, and construct systems for trading. The systems can bring discipline to a trader’s strategy by providing clearly defined circumstances in which a trader has reason to buy, sell, hold, and so on.
Some traders, like chartists, specialize in forms of technical analysis. Chartists are theorists who tend to believe that all the information you need to make money trading can be found on the right chart. They identify parameters and algorithms that can offer efficient trading signals and profits using technical indicators – charting tools that appear as lines on charts, or as other kinds of graphical information. These indicators can serve as guidelines for buying and selling opportunities.
Technical indicators include oscillators, trading bands, and signal lines. A line, a crossover of two lines, or an entirely new bi-axial graph or table could fall under the definition of an indicator. The indicator is meant to make visible what may not be as easily perceived from other data. Combined with moving averages, trade volume information, and standard deviation bands, these can indicate the optimal places to buy and sell.
There are leading indicators which attempt to predict and signal when a new reversal or trend will start, and there are lagging indicators which attempt to confirm that a trend or reversal has begun. These can give investors more confidence and ability to participate in market momentum.
Technical analysis is different than fundamental analysis, of course. Fundamental analysis looks at the company behind the chart, it’s accounting and SEC filings, as well as the market position of the company among its peers and other real-world information. Technical analysts focus only on the price and volume data, extrapolate as much information as they can from it, and attempt to find overbought and oversold conditions from that vantage point.
Technical analysis is more popular than ever. Not only can we see and share this information more quickly today than ever before, but we can even automate our trades to let a computer use a disciplined technical strategy we define. It takes the emotion out of investing, to a large degree, and that’s a good thing.