{"id":461841,"date":"2022-08-25T13:03:04","date_gmt":"2022-08-25T12:03:04","guid":{"rendered":"https:\/\/www.finder.com\/uk\/?p=461841"},"modified":"2026-02-02T16:19:22","modified_gmt":"2026-02-02T16:19:22","slug":"technical-analysis","status":"publish","type":"post","link":"https:\/\/www.finder.com\/uk\/share-trading\/share-trading-guides\/analysis\/technical-analysis","title":{"rendered":"Technical analysis for trading"},"content":{"rendered":"

If you\u2019re just starting out as an investor or beginning to learn<\/a> how to trade stocks and shares, you need a plan and a strategy<\/a>. Understanding the basics of technical analysis is a great way to sharpen your investing skills, giving you a solid trading foundation to build from.<\/p>

What is technical analysis?<\/h3>

This is one of the main methods used by traders to research potential price movements of assets. The basic concept involves interpreting price and volume charts to spot patterns or movements based on historical data and trading psychology.<\/p>

It\u2019s mostly used for researching stock trades. But, the techniques can apply to most assets that have enough historical data available. This includes securities such as commodities<\/a>, currencies (forex), futures<\/a>, fixed-income assets (bonds) and cryptocurrencies<\/a>.<\/p>

Wait, what?: The theory behind technical analysis<\/h3>

We can hear you thinking it: \u201cWait, what? How about all that \u2018Past performance is not indicative of future results\u2019 stuff? How about company performance, market trends and all that? Aren\u2019t they supposed to be important factors to decide whether it\u2019s time to buy or sell?\u201d<\/p>

Well, the validity of technical analysis is based on two theories:<\/p>

  1. Prices already include all market factors.<\/strong> According to technical analysis theory, you don\u2019t really need to look at how a company is doing or at the rest of the market because the price of a commodity already takes all these things into account. All available information is reflected there, so there\u2019s no point in doing more research or looking at anything else.<\/li>
  2. Price movements aren\u2019t random, they follow trends.<\/strong> So historic data, if properly analysed, can give information on future performance.<\/li><\/ol>

    This means that if, for example, something suddenly goes wrong with a company, technical analysis is not necessarily going to reflect it. Technical analysis only works if condition one is satisfied, that is, if market prices reflect all available information. Whether that\u2019s always true or not, is up for debate.<\/p>

    How is technical analysis used in trading?<\/h3>

    By looking at statistics and trends in prices and trading volumes, traders use this data to make educated guesses on where the price of an asset could be heading next. The information often relates to relatively short-term movements rather than major long-term trends.<\/p>

    This allows traders to use technical analysis to gauge potential possibilities and outcomes for the price of shares and other assets. However, skilled traders and professional investors will often use other forms of research in addition to technical analysis before making investment decisions.<\/p>

    How accurate is technical analysis?<\/h3>

    It\u2019s not an exact science. There are no foolproof formulas or tactics because there are so many variables at play with any single investment. That said, skilled traders can often be fairly accurate with a stated margin of error.<\/p>

    Yet, unexpected things can happen in the markets. Unpredictable factors can influence assets. These events are often not accounted for with technical analysis, meaning that the eventual results can fall way outside the estimated price ranges determined by traders.<\/p>

    What are the different types of technical analysis?<\/h3>

    This analysis relies on a broad range of patterns and signals. The methods have developed and evolved since the introduction of the first theories by Charles Dow at the end of the 19th century.<\/p>

    The following are the two main types of technical analysis:<\/p>

    1. Top-down<\/strong>. This is a popular choice for short-term traders. It starts by looking at the overall economy. And then, gradually works through a sector or industry before finishing with the evaluation of a stock.<\/li>
    2. Bottom-up<\/strong>. With this approach, traders begin by looking at an individual stock or asset, attempting to find useful entry and exit points that could play out over a long-term trade.<\/li><\/ol>

      Here are some of the major indicators and signals used to support the various theories and methods of trading based on technical analysis:<\/p>