Technical Analysis


Generally, the methods used to analyze all marketable products and make investment decisions fall into two very broad categories: Fundamental Analysis and Technical Analysis. But it must be well understood that these two Analysis Methods definitely complete each other.


While Fundamental Analysis involves studying the characteristics of a traded Product in order to estimate its value. Technical Analysis takes a different approach and its Technicians (also called Chartists) use other Methods based on past price movements in the market.

The Different Methods used are: Classical, Mathematical and some are Esoteric or Exotic tools…. Technical Analysis also studies supply and demand in the market, in an attempt to determine what direction, or trend, will prevail in the future. Technical Analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components.

As you see, Technical Analysis is a mixture of Science and Art. Therefore, if you understand its benefits and limitations it can give you a new set of tools or skills that will enable you to be a better Trader or Investor for sure.

Basic Assumptions of Technical Analysis

Technical Analysis consists of a number of Methods used for evaluating all marketable Products (Securities, Currencies, Commodities, etc…) by analyzing the statistics generated by market activity, such as past prices and volume. Technical Analysts do take into consideration the Product’s intrinsic value, but they use charts and other tools to identify Trends and Patterns that can suggest the exact timing for an entry and for an exit.

Just as there are many investment styles on the Fundamental side, there are also many different types of Technical Traders. Some rely on chart patterns, others use technical indicators and oscillators, and most successful ones use some combination of the two, plus the Fundamental Analysis as a real support confirming their analysis. In any case, Technical Analysts use and study the historical Price and Volume data, which mainly differentiates them from their Fundamental counterparts. Technical Analysts care a lot about a Product’s past trading data (Price History) and what information this data can provide for its future direction.

The field of technical analysis is based on three assumptions:

• The Market Discounts Everything
• The Price Moves in Trends
• History Tends To Repeat Itself

The Market Discounts Everything

Technical Analysis assumes that, at any given time, the market price of any Underlying -the Currency / the Stock or the Commodity- reflects everything that has or could affect it, including the Fundamental factors.For example, concerning Stocks, Technical Analysts believe that the Company’s Fundamentals, along with broader economic factors and market psychology, are all priced into the stock, disregarding the need to actually consider these factors separately. Consequently, this generates the analysis of only the price movement, which technical theory views as a Product of the Supply and Demand for any particular Stock in the market.

The Price Moves in Trends

In Technical Analysis, price movements always follow the prevailing Trends. This is very clear when we look at any Price-Chart. Therefore, after a Trend has been identified, the future price movement is more likely to be in the same direction as the Trend, than to be against it. A number of Technical Trading Strategies are based on this assumption.

History Tends To Repeat Itself

Another important idea in Technical Analysis is that History tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical Analysis uses Chart Patterns to analyze market movements and understand Trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate Patterns in price movements that very often repeat themselves.