Technical Analysis

Definition

The term technical analysis refers to a forecasting methodology that attempts to predict future price movement based on historical price patterns.  Technical analysts will examine a security's past prices, trading volumes, open interest, as well as short selling when predicting future price direction.

Explanation

Technical analysis is used by investors to predict future price movements of a security.  The information analyzed by the investor includes historical trading trends, price volatility, and trading volumes.  While a fundamental analyst will examine data like a company's balance sheet, income statement and financial ratios; the focus of a technical analyst is historical trends.  Some of the basic tenets of technical analysis include:

  • Historical trading volumes and prices can be used to predict future price movement.
  • Price changes are not random, and by examining historical long and short term trends, investors can predict, and profit from, current trends.
  • Current prices reflect all underlying fundamental information; therefore, technical analysis should be used to predict future prices.
  • Prices will tend to trend up, down, or flat over time.

Related Terms

open outcry, naked option, married put, listed option