What is technical analysis

Two traders look at the very same stock. One studies the business behind it: its profits, its debts, its industry. The other studies only the chart, the running record of price and volume. That second trader is doing technical analysis. It is one of the most useful and most misunderstood skills in the market, so it is worth being clear from the first line about what it is, and what it is not.

What technical analysis is

Technical analysis is the study of price and volume, usually on a chart, to judge the probability of what price might do next and to manage the risk around that judgement. Notice the careful words: probability, and risk. Technical analysis does not tell the future. It shifts the odds a little and, more importantly, gives you a framework for deciding where you are wrong and what that will cost.

It rests on two plain ideas. The first is that a stock's price already reflects everything known and felt about it at that moment, every piece of news, every hope and fear of everyone trading it. The second is that prices tend to move in trends and to repeat familiar behaviours, because the humans behind them repeat familiar behaviours. A chart, then, is a record of crowd behaviour, and technical analysis is the reading of it.

How it differs from fundamental analysis

Fundamental analysis, the subject of another course, asks what a business is actually worth, studying its finances over a long horizon. Technical analysis asks a different question: what is the price likely to do, and where is my risk. The two are not enemies, and many people use both, one to choose what to own and the other to time and to manage the trade. But be clear on the limit: a chart tells you about the behaviour of the price, not whether the company behind it is any good.

The honest part, up front

Technical analysis attracts more hype than any other corner of the market, so the honesty has to come early. No pattern and no indicator predicts the future. Every one of them fails, often. What a good technical trader actually gains is not a crystal ball but a framework: a way to spot the trend, to mark the levels that matter, and above all to decide in advance where the idea is wrong and the trade should be cut. Most of the value is in that disciplined management of risk, not in the signals themselves. Anyone selling you a setup that wins nine times out of ten is selling hype, and usually hiding the losses.

What to carry forward

Technical analysis reads price and volume to weigh probabilities and to manage risk, resting on the ideas that price already reflects everything known and that human crowds repeat their behaviour. It answers a different question from fundamental analysis, which is about a business's worth, and the two can work together. Above all, it is a framework for deciding and for defining where you are wrong, not a way to predict the future, and its real value lives in risk management rather than in any signal.

Before any of that, you need to read the chart itself. The next chapter covers the three kinds of price chart and why one of them won.