technical analysis

Technical analysis is a method of investing which focuses on past price movements and attempts to identify trends that indicate future price movement. The successful technical analyst buys and sells on the basis of his preferred technical indicators, and hopes to make a profit when the share price fulfils his predictions.

Underpinning technical analysis are three core principles which are central to the TA faith:

1. Share prices move in patterns
2. Patterns repeat themselves
3. If you anticipate a pattern correctly, you can profit from it

Different technical analysts use different techniques, but for the most part they rely on the same raw data:

• Price (whether share prices, commodity prices or option prices)
• Volume (the number of shares or other instrument traded per day)

Using historical data of these two variables, the analyst creates a chart (usually on a computer using special software), identifies patterns, and trades on the basis of what they tell him.

• If a trend indicates that the price of a share is due to go up, he buys shares or call options.
• If a trend indicates that the price of a share is due to go down, be sells shares or buys put options.