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Technical analysis operates from the assumption that past trading activity and
price changes of a security can be valuable indicators of the security's future
price movements when paired with appropriate investing or trading rules.
Professional analysts often use technical analysis in conjunction with other forms
of research. Retail traders may make decisions based solely on the price charts
of a security and similar statistics, but practicing equity analysts rarely limit their
research to fundamental or technical analysis alone.
Today the field of technical analysis builds on Dow's work. Professional analysts
typically accept three general assumptions for the discipline:
Across the industry there are hundreds of patterns and signals that have been
developed by researchers to support technical analysis trading. Technical
analysts have also developed numerous types of trading systems to help them
forecast and trade on price movements. Some indicators are focused primarily
on identifying the current market trend, including support and resistance areas,
while others are focused on determining the strength of a trend and the likelihood
of its continuation. Commonly used technical indicators and charting patterns
include trendlines, channels, moving averages and momentum indicators.
Price trends
Chart patterns
Volume and momentum indicators
Oscillators
Moving averages
Support and resistance levels
Technical analysis differs from fundamental analysis in that the stock's price and
volume are the only inputs. The core assumption is that all known fundamentals
are factored into price; thus, there is no need to pay close attention to them.
Technical analysts do not attempt to measure a security's intrinsic value, but
instead use stock charts to identify patterns and trends that suggest what a stock
will do in the future.
Another criticism of technical analysis is that history does not repeat itself
exactly, so price pattern study is of dubious importance and can be ignored.
Prices seem to be better modeled by assuming a random walk.
A third criticism of technical analysis is that it works in some cases but only
because it constitutes a self-fulfilling prophesy. For example, many technical
traders will place a stop-loss order below the 200-day moving average of a
certain company. If a large number of traders have done so and the stock
reaches this price, there will be a large number of sell orders, which will push the
stock down, confirming the movement traders anticipated.
Then, other traders will see the price decrease and also sell their positions,
reinforcing the strength of the trend. This short-term selling pressure can be
considered self-fulfilling, but it will have little bearing on where the asset's price
will be weeks or months from now. In sum, if enough people use the same
signals, they could cause the movement foretold by the signal, but over the long
run this sole group of traders cannot drive price.