What Is Technical Analysis? The Concept and 4 Recommended Indicators

Technical analysis (TA) is also simply called chart analysis. It is a method of predicting future market movements based on past price action and volume data.

Unlike fundamental analysis (FA), technical analysis doesn't consider other factors of an asset and focuses solely on price movements. In other words, it aims to identify trends and favorable trading opportunities by examining price changes and volume data.

What Is Technical Analysis?

Technical analysis is basically the analysis of an asset's current and past prices. Its basic premise is that asset prices don't move randomly but form identifiable trends over time.

At its core, technical analysis is about analyzing the forces of supply and demand in the market, that is, buying pressure and selling pressure. These forces are closely tied to the emotions of traders and investors (mainly fear and greed).

As mentioned earlier, because technical analysis looks only at price, it leaves out the subjective guesswork of fundamental analysis.

The Origins of Technical Analysis

You could say technical analysis began with Charles Dow, a journalist and the founder of The Wall Street Journal. Old man Dow observed that individual assets and markets usually show characteristic trends. Based on this, he put forward Dow Theory, which became the foundation of technical analysis.

Back then, technical analysis meant drawing charts and doing the calculations by hand, but today you can use technical analysis tools on a chart with just a few clicks.

Recommended Technical Indicators

There are many technical indicators, but we've put together the 4 that traders use most. Click an article title to take a closer look.

Trading with Technical Indicators

Technical indicators help you identify the overall trend, but they can also be used as trading signals.

For example, an RSI above 70 can be a signal that the market is moving in overbought territory. When the RSI drops below 30, it is generally seen as an oversold market signal. You might buy or sell an asset based on these signals. However, these signals are not always 100% accurate.

Criticism of Technical Analysis

Technical analysis is widely used in every market, but as mentioned above, it isn't always accurate, and it can produce false signals in highly volatile or sideways markets.

Although technical analysis deals with data, it is still influenced by personal bias and subjectivity. Even with the same technical indicator, the decisions traders make from it can differ from person to person.

Meanwhile, compared with technical analysis, fundamental analysis looks at an asset from a broader perspective. Putting all this together, combining technical analysis with a trend-analysis approach isn't a bad strategy. Technical analysis is mainly used by short-term traders, while fundamental analysis tends to be favored by fund managers and long-term investors.