Introduction to technical analysis

E*TRADE from Morgan Stanley


Will XYZ stock go up or down?

Some traders try to answer this question by studying the basic characteristics of XYZ’s business. These characteristics may include sales, earnings, debt, and other financial aspects of the business. This method of analyzing a stock is known as fundamental analysis.

Other traders may try to answer the question by applying technical analysis. This form of analysis studies the trading activity of the stock. These characteristics generally include historical prices and volume of XYZ stock and related data.

What is technical analysis?

Generally, technical analysis is the process of gathering and studying historical market data in an attempt to forecast a stock price in the future. More precisely, technical analysis attempts to measure the supply of, and demand for, a stock.

Fortunately for traders today, gathering and studying historical market data is less challenging thanks to technology. All the historical data and tools you may need to perform technical analysis are built into E*TRADE and Power E*TRADE.

Assumptions of technical analysis

Technical analysis rests on three assumptions, the first of which is that the market discounts everything and a stock’s price reflects all known information about the company, economy, interest rates, and other core drivers of the business. Therefore, some traders ignore these core drivers and instead focus on the stock price.

The second assumption of technical analysis is that stock prices tend to move in trends. There are three types of trends traders attempt to identify with technical analysis: uptrends, sideways trends, and downtrends.

Among the three assumptions of technical analysis, most traders focus on the last two: identifying trends and recurring historical patterns. You can learn how to identify trends and patterns in stock prices through other articles in this collection.

What to read next...

Most technical analysis is performed by observing and interpreting charts. A chart is a historical record of stock price movements plotted over a time period, like one day, one year, one decade, or even longer.

One of the assumptions of technical analysis is that history repeats in the stock market. One example of this is recurring patterns in historical stock prices. These price patterns are essentially shapes that sometimes appear on stock charts.

Among all the aspects of technical analysis, perhaps the most important and actionable concepts are support and resistance. Many other aspects of technical analysis, such as price patterns, are based on the key concepts of support and resistance.

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