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Reviewed by Nov 18, 2022| Updated on
Technical analysis involves the evaluation of various investments and identifying business opportunities for the same by studying recent trends such as the change in prices and volume traded among others.
While fundamental analysis involves the analysis of a security's fair value, technical analysis, on the other hand, focuses more on the price patterns, trading trends and involves evaluating the security’s pros and cons. With the help of historical trading data, technical analysis can be performed on any security.
According to technical analysts, the change in the price of a security can be estimated to a certain extent by analysing the historical data of trading trends and price movements of the security in concern.
Technical analysis involves 3 significant assumptions: 1. The study of price movements alone helps in determining the supply and demand of a particular security. 2. A security's price is expected to follow a previous trend most likely. This can be a short-term, medium-term or a long-term trend. 3. Analysts believe that market psychology is entirely predictable due to predictable emotions. Analysing these patterns in emotions with the subsequent movements in the market can help in understanding the price trends of a particular security.
Charles Henry Dow, one of the fathers of technical analysis, introduced the Dow Theory mentioning the concept of technical analysis for the first time in the late 19th century. Thanks to consistent research over the years, technical analysis has evolved to such an extent that it now involves a plethora of trading patterns and trends to learn a security's movements.
Technical analysis is one of the two main methods that help in analysing securities and making investment decisions. Fundamental analysis, the other process, determines the intrinsic value of a security by examining the business/firm's financial statements.
However, technical analysis focuses more on the statistical movement of a security's price historically and understanding the market scenario. This helps in understanding the reason behind the change in prices and predict a change in trend in the future.