Technical analysis is a methodological approach to forecast the direction or the trend of price movements in the stock market by analyzing all available historical data on prices and volumes. The technique basically considers supply and demand forces to predict the future outcome.
The methodology does not take in to account the intrinsic value of the stock, whether it is overvalued or undervalued, rather technical analysis is based on the past trading data and trends.
Technician uses variety of models, tools and techniques to analyze price, volume and any other market information. Some of the popular mechanisms are chart patterns, economic indicators and oscillators. Charts may be available to show prices over various period of time frames – hourly, daily, weekly, monthly or even many years. Various technical indicators and metrics like Relative Strength Index, Money Flow Index and Moving Average are also used by technical analysts. Oscillators like Stochastic oscillator, RSI and ROC are primarily used when there is no clear trend available. Any stock market analyst usually uses a combinations of these tools to predict if the security will move upward or downward in the future.
Technical analysis is mainly based on following three axioms –
- Market discounts everything including fundamental factors
- Technical analysts believe that a company’s stock price is already the result of all economic factors, market emotions and all publicly available information about the company. Hence, there is no need to consider these fundamental factors in further analysis.
- Prices moves in trends
- Once a trend has been identified, there is an enormous probability that the market price will follow the given trend.
- Historical trends do repeat
- Due to the market psychology, a consistent reaction is observed for any given action in the market. This causes price movements to follow a repeated pattern over a period of time.
Stock market technical analysis is a helpful tool to predict the future movements for stocks, indices, commodities, futures, fixed-income securities, forex or any other traded asset with historical trading data.