Technical analysis

There is a theory that you can predict future share price (or index) movements by looking at past movements. Commentators who base their forecasts on this theory rather than on economic or balance sheet fundamentals are known as technical analysts or ‘chartists’ (because they use charts to look at price movements).

The idea of looking to the past to predict the future can be effective. Suppose the share price of a company fluctuated between 200p and 250p. This would suggest that at 200p there were investors who considered the shares to be cheap and bought, and that at 250p there were investors who considered them expensive and sold.

If the price were to break above or below its normal levels (‘break out of its trading range’), the chartist, while not needing to know exactly why, would know that perceptions had changed and that the price would be likely to keep moving in its new direction until it hit a new ‘resistance level’, or level where enough investors considered it cheap or expensive to halt the move.

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