Technical Analysis -- What it Is and How it Works

Stock trading strategies can be broadly divided into two main categories -- Technical Analysis and Fundamental Analysis. Since we mainly use Fundamental Analysis when we pick stocks, we will keep this discussion basic.

Technical Analysis is a method that looks at how the price and trading volume of a stock have behaved over time. Technical Analysts (stock pickers who use this method) look for trends, patterns, deviations in this data and use their findings to predict the future price of the stock.

In its purest sense, this method of picking stocks ignores the fundamentals of the stock.

Main Tools Used

Let's look at some important tools that Technical Analysts use:

• Technical Indicators: Also called technicals, these are mathematical calculations of stock price and/or trading volume. When calculated for different time periods and laid out, they form what is called a series of data points. These points can then be studied for trends.....
• Stock Charts: Charts are at the heart of Technical stock analysis. You get a stock chart when you plot one or more technical indicators on graph paper. Let's look at some important stock charts that are used.....

Trading vs. Investing

Technical stock analysis is more of a trading strategy than an investing strategy. Let's look at what exactly the difference is between trading and investing.....

Day Trading

Now that we understand what trading means, let's look at a type of trading that gets a lot of attention....

Great Technical Analysis Websites:

Since our expertise is in fundamental investing, we will provide you with a link to, what we consider, outstanding Technical Analysis websites.

• Online Stock Trading Guide — an excellent website that, at a very practical level, educates you in stock trading. This site is rich in content and takes you from the beginner level to advanced concepts.

In summary, technical analysts look at the pricing history and volume of a stock to detect trends. They use these trends to predict the future direction of the stock's price. To help them make these decisions, they rely on technical indicators and stock charts. We also looked at an important class of technical analysts -- day traders.

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