What is technical analysis?

Technical Analysis is a look at the charted history of price movements over a period of time in an effort to determine the short term movement of the price. A number of items may be perused in the process: the 20 day moving average, the 60 day moving average, the 200 day moving average. The “shape” of daily price movements, which reflects the pattern the stock price demonstrates (Does it open at the high, low, or midpoint, and where does it close?). Also, the breadth of each day’s movement, does it move up or down on heavy volume, or light one way, heavy another?

Analysts may also look at the overall shape of the price chart. A common one is to see if the chart looks like a “shoulder” (up and then down over time) followed by a “head” (a higher high, followed by another down turn to the same level where it was last moving up), followed by another shoulder.

There is no single technical theory that is dominant or has consistently demonstrated a method of predicting stock prices.

To add to @zenvelo‘s very good intro, technical analysis will attempt to find any predictor of price. The indicators people work with include earnings (and all sorts of calculations based on earnings), fluctuations in market sectors, the weather, and the news.

High Frequency Trading (HFT) will also use state of the art (expensive!) computing and communications to analyse trade volumes and timings and any other relevant data they can get their hands on as absolutely quickly as possible, so one bunch of hyper-wealthy thugs can beat the stuffing out of another bunch of hyper-wealthy thugs while sucking the profit out of the markets for regular people.

It’s voodoo. If it worked, it would work, but it’s a lot of hand-waving nonsense. If I flip a coin and it lands on heads 1000 times in a row, the next flip still has a 50–50 chance of being heads.

Fundamental Analysis looks at the health of the company and tries to make educated predictions about what it should be worth based on how well it is running. It’s a bit like predicting the weather (more accurate in the short term, less so over the long term) because there are so many unpredictable variables involved. For example North Korea could start up the bellicose rhetoric, we could get a huge natural disaster, a massive oil spill, the company you’re investing in could have major accounting fraud going on that nobody knew about, one of it’s obscure patents could unexpectedly result in a hugely popular revolutionary new product, etc. So it’s pretty hard to do right, but at least it’s grounded in facts, and admits it’s assumptions.

@gorillapaws Real technical analysis is not voodoo at all, and the markets are not random like coin flips. There are plenty of real actors at work in the markets, and predicting their behavior is what technical analysis is all about ultimately.

On the other hand, there are plenty of ways to do the analysis badly. There are even more ways to set up a trading system badly, and lose a LOT of money. The joke Q:“How do you make a small fortune in the markets”; A:“start with a large fortune” is sadly a real and common story, not often told because of embarrassment, because people underestimate the complexity of the problem an the dedication of the competition.
Even the big guys who have invested many millions in high-frequency trading systems take a hit once in a while because it’s a razor-edge game and one fumble can ruin your whole microsecond.

For an individual technical analysis can only be a hobby. Mere mortals will get hammered eventually when one or another of the big boys, or a government, changes its mind and pushes your holdings deep into margin call territory.

If you would like to learn technical analysis, let me recommend the book that is required reading for traders on the Chicago exchange. Technical Analysis of the Futures Markets by John J Murphy. Hopefully available through your library as it is an expensive book with extremely complicated material. It will, however thoroughly educate you on technical analysis. Good luck!