Glossary

Technical analysis

Technical analysts or 'chartists' attempt to predict future share price (or index) movements by looking at past movements.

Technical analysis refers to the use of trends in market data – such as the price of securities and volume traded – to attempt to forecast the future direction of markets. It does not take account of fundamental data such as a company’s earnings. Instead it focuses solely on how   individual securities and groups of securities are trading. 

Users of technical analysis argue that the collective actions of buyers and sellers mean that all available fundamental information should already be reflected in current prices. However, the way in which investors interact as they respond to the flow of new information creates recurring patterns of behaviour, so recognising these patterns may allow chartists to anticipate what is likely to happen next. 

There are a large number of technical analysis indicators, some of which are quite complex. However, the core of this strategy is the idea that prices trend – ie, tend to move up, down or sideways over a period of time. So the simplest approaches revolve around looking at these price trends on charts – hence technical analysts are known as chartists. An analyst may look at trend indicators such as the moving average over, say, the last 50 days, as well as price patterns that they believe indicate whether the trend is likely to change. These may include resistance (a price that the security has not been able to exceed) and support (which it does not fall below).

Technical analysts may also look at relative strength (how well certain stocks and sectors are doing compared with others) and breadth (how many stocks are rising compared with the amount that are declining). Some will also employ a range of numerical indicators that aim to measure sentiment towards a security or the wider market. Momentum indicators look at how quickly prices are changing, volatility indicators focus on how volatile prices are and volume indicators are based on the amount being traded.

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