What is Technical Analysis/Trend Analysis (TA)?

Technical Analysis (TA), also known as Trend Analysis, is an analysis method that allows estimating the price direction by the use of price charts. The main idea behind technical analysis is that market price moves up or down based on external factors. This includes the political climate, natural disasters, psychological notions, and many other elements.

In order to fully understand technical analysis, you must know its three basic principles and assumptions.

1. The market discounts everything. This means that “everything”, which includes all of the external factors mentioned above, has an influence on whether or not people will participate in the trade market;
2. Prices move in trends. These trends are essentially patterns and directions in which the prices move. Once you’ve established a trend, chances are that the price movement will go in the same direction;
3. Trends and patterns repeat themselves. Or, in other words, history repeats itself. This assumption usually manifests itself in repetitive price movements.

Furthermore, there is another vital concept in a stock market technical analysis called support and resistance. Technical analysts use support and resistance levels to estimate the time when the prices will begin to climb. Support and resistance levels help to determine price movement. Traders go short if they think a resistance level was reached, on the other hand, traders go long if they think a support level was reached. Additionally, these levels are a good signal of when is a good time to open or close the trade. 

Technical analysis is not considered to be a good indicator for long-term investments.

Traders that use technical analysis are usually agile short-term investors. This means that they hold a position for a short time while keeping an eye out for market swings. They mostly shine in their ability to quickly enter and exit positions. In case the chosen asset does not perform well, the trader exits in order to cut their losses as soon as possible.

Technical analysis is no stranger to criticism. The main problems critics point out are based on its three basic assumptions. You can’t count on history repeating itself every time. In turn, this makes predictions based on technical analysis inaccurate. Additionally, technical analysis works within the constraints of market patterns. Therefore, critics claim that it’s not possible to fully understand the market and its inner workings while utilizing technical analysis.

What are the differences between technical analysis and fundamental analysis?

While the purpose of both technical analysis and fundamental analysis is to predict the patterns of future assets, these methods take very different sources of information into account.

Starting off with the basics, technical analysis is considered to be a short-term analysis, therefore, it does not take into account data that shows how valuable an asset has the potential to become in the long run. In other words, it’s only useful when evaluating the movement of prices in the near future. 

Fundamental analysis does quite the opposite by investigating a variety of factors such as the industry and the company’s financial statements in hopes to estimate the asset’s intrinsic value. On the other hand, people who favor technical analysis claim that fundamental analysis delves too deep into these factors when the price and volume say the exact same thing.