Financial Glossary Header Image

Technical Analysis

Updated on March 16, 2023

Technical analysis can be defined as a trading style which is used for the analysis and evaluation of investments and identification of trading opportunities. It involves predicting price movements in stock markets, by using price charts, market statistics and certain patterns specific to the Technical analysis strategy.

Features of Technical Analysis

Features of Technical Analysis are:
1. Technical Analysis includes the study of demand and supply for a stock along with the changes in price, volume and market direction.
2. It uses the historical price volume data and price changes of a security under consideration.
3. Technical Analysis is used to produce trading signals by making use of charting tools.
4. It is also helpful in assessing the strength or weakness of a security relative to the market.
5. It is used by traders to identify entry and exit points in the market.

Examples of Technical Analysis tools

Some of the tools used in Technical Analysis are Moving Averages, Support and Resistance levels, MACD, RSI and Bollinger bands.

Limitations of Technical Analysis

Markets are not entirely predictable and there is always a scope for prices moving totally opposite to what the charts depict or a sudden market movement in either direction can render the predictions useless.
Historical price patterns are not always predictive of similar movement in future.
A proper risk management strategy should be in place to protect against adverse price movements.