What is Technical Analysis Investing?

Technical analysis is an investment method that relies heavily on trends in data and is most actively used by short-term investors, or those looking for the perfect time to buy or sell.

As an investor there are a variety of methods that you can use to evaluate stocks and certain other investment options in order to get the proper information to make a wise decision regarding whether and when to buy or sell.

One of the more popular methods in today’s financial world of investing is a process called technical analysis.

Technical analysis is a method of evaluating stocks or other investment types that heavily rely on short-term patterns in data. Among these data determiners are price movement, volume, as well as open interest as way of predicting the future movements of prices.

The analyst or investor uses these data patterns by triggering a buy or sell based on specific markers. A person investing by way of technical analysis must employ clear principles of action based on what information they think market movement data is giving them. The technical analysis has to make short term predictions of stock movement based on wider market trends.

The unique component of technical analysis is its lack of concern for business and its concepts. While any investor can employ a hybrid set of techniques that include other methods such as , technical investing only focuses on the data that is provided by various charts and graphics in order to identify and plot trends as well as particular points in which to buy or sell stocks or other investment options. In other words, data from the present is compared with data from the past and is used to determine how certain events and movements in the past could give an insight into how the stocks will move in the future.

What technical analysts or investors with knowledge of technical analysis do is to review and plot a stock’s average growth rate and then they look for aberrations in either the stock price or trading volume, which manifests itself in the form of dips and jumps, as a way of getting a picture of the markets reaction to past events. Basing their assumptions on the patterns made by previous prices, the analysts or investors would then make an educated guess on whether the stock price is rising or falling.

But technical analysis not only reveals historical patterns. Indeed, analysis of data can also present a picture of current developments. If the technical data shows a big jump in trading volume after a large institutional entity sold off stocks, this could be seen as a sign that other big investors may also unload their stocks.

Technical analysis investing follows three main principles that is central to its methodologies:

1. the movement of share prices occur in patterns
2. These patterns repeat themselves
3. If you can correctly anticipate the arrival of a pattern then you can profit from it

As previously mentioned, most technical analysts or investors rely on price (share price, commodity price, option price) and trading volume as their two main sources of technical data. From the numbers obtained in these two variables, analysts can then create a chart (usually a line graph). It is the analyst’s or investor’s role to look for and identify patterns in the chart and then make the trading decisions based on the patterns that he has identified.

Our view at the Common Sense Investor is that technical investing should only be done by those with a great deal of experience. We prefer a hybrid method of investing that mixes fundamental and technical investing, but with a heavy emphasis on business fundamentals. Over the long term, we think it makes the most sense to invest with strong companies with solid management and growing market share.

More Information

For an overview of the differences between technical and fundamental analysis, please read our article entitled: Technical Vs. Fundamental Analysis.