The basics

In the previous sub chapter, you learned about fundamental analysis, which involves inspecting company finances. We’re now shifting into a different type of analysis.

Technical analysis involves identifying and predicting trends in the stock market. Technical analysts typically pay little-to-no attention to the fundamentals of a company (e.g. expenses, revenues, etc.). They’re more concerned with finding predictable stock price patterns and betting on those patterns occurring again.

Technical analysts believe history repeats itself in the market. To better understand this, let’s look at a stock chart:

While this may look like a basic stock chart, a technical analyst would identify this as a unique formation. Specifically, this is a head and shoulders bottom formation, which we will learn more about later in this subchapter. While the stock’s market movement already played out with the chart above, it could be used to predict where the stock price goes in the future. For example, what if a few days later the same stock started fluctuating like this:

While there’s no promise the market price will move in the same direction, there is some evidence of repeating market trends in the real world. If this stock follows the same trajectory as it did previously, a purchase at this point would be profitable:

Again, the market is unpredictable and could easily go the other way. Technical analysis is a prediction tool, but not all predictions come true. It takes a fair amount of chart analysis to find these trends, which is why technical analysts are sometimes referred to as “chartists” (chart artists).

In this subchapter, we’ll explore various ways technical analysts interpret and use market data to make investment decisions.