The technical analysis, also known as graphical, is a tool used by some investors to forecast moves and trends for pricing on some markets and assets, based on historical pricing data, supply and demand stats, volumes and opened positions. Besides, mathematical indicators and formulas are used to support this kind of analysis, such as deviations, moving averages and statistical methods. The technical analysis tells an investor when he shouldbuy or sell a share, but can’t explain why exactly. That happens because this analysis bases its conclusions in series and trends that use to follow patterns and cycles that can be noticed.
The technical analysis has been firstly developed by Charles Dow, based on three premises:
1. Pricing reflects the markets strenghts
All factors that affect prices (news, expectancies, fundamentals, gossips, etc) use to be immediately considered by the market and influence current prices and deals. Thus, prices practiced by a market are basically fair, considering those prices reflect future events and not past events.
2. Prices move following trends
Dow proposed that prices follow trends in the long term, and their moves are not random, but trendy instead. This way, technical analysis intends to study those trends and try to anticipate them, in order to find ways and financial positions that can generate profits. Prices can follow downward, upward or steady trends.
3. Historical pricing moves use to repeat
Price moves tend to repeat on graphs as time goes by. That happens because investors remember past events when assets hike or drop, repeating behavioral patterns. So, they basically know when an asset is over or undervalued. The technical analysis try to identify such patterns and predictable behaviors in order to anticipate changes and moves, finding signals of downward and upwards trends.
Technical analysis enables a company to fully understand what caused moves and changes in a share or asset in the past, although it just points directions to follow in the future. By using maths and stats, the graphical analysis work with chance and probabilities rather than facts and consolidated data. This way, it works well for pointing long term trends based on past cycles and patterns, but is not as “factual” as fundamentals analysis.