History repeats itself — at least on the stock exchange
Technical analysis builds on one fundamental assumption: Historical price patterns repeat themselves. If a stock has bounced from a certain level three times before, the probability is good that it will do so again.
Unlike fundamental analysis — which looks at the company finances and earnings — technical analysis focuses exclusively on the price chart and trading volume.
"Patterns are the universe way of communicating. The one who learns to read them has an advantage over all who only see randomness."— Florence Scovel Shinn
The most important tools
Support and resistance
Support is a price level where the stock has historically turned and risen. Resistance is a level where it has turned and fallen. These levels act as floors and ceilings for the price.
Moving averages
The average price over a specific number of days. MA50 and MA200 are the most used. When MA50 crosses above MA200 it is a buy signal — called the Golden Cross.
RSI
Relative Strength Index — measures whether a stock is overbought or oversold on a scale of 0-100. Above 70 = overbought (may fall). Below 30 = oversold (may rise).
Volume
Number of shares traded. High volume confirms a price movement. Low volume means the movement may be false. Always look at volume in context with price.
Technical vs. fundamental analysis
Fundamental analysis
Tells you WHAT to buy. Which company is undervalued? Which sector has good prospects?
Technical analysis
Tells you WHEN to buy. Is the price in an uptrend? Is there a good entry point?
The best combination: Use fundamental analysis to find good companies — and technical analysis to find the best time to buy them.
Free tools for technical analysis
- TradingView — tradingview.com — the best free tool for technical analysis
- Yahoo Finance — simple price charts with technical indicators
- Investing.com — advanced charts and indicators
"All experts were once beginners. The only difference is that they did not give up while learning the language."— Florence Scovel Shinn