The process of technical analysis doesn’t attempt to predict intrinsic value of a stock; rather it is used to potentially figure out how the stock will move in the future. These calculations are based upon charts, market activity, past price and the volume of sales.
Analysts believe that past performance of a stock or market is a good indicator of how the future will unfold. Unlike a fundamental analyst, who would evaluate each product available for sale before making a decision, the technical analyst is directed by the patterns and activity she sees in the broader scope.
A fundamental analyst searching for clues as to which stock to purchase would look at earnings, dividends, advances and research. A technical analyst would be more interested in how investors feel about the same developments and if the investors had the ability to back up their opinions. Technical analysts are more likely to use tools, such as charts, to identify trends in order to profit by them.
Technical analysts believe that the market moves in trends. Since, they argue, history consistently repeats itself, if you understand the trends you can plan your purchases and sales to maximize profits based upon those trends.
Different markets are more inclined to use one sort of analysis versus another. For example, in the Forex market technical analysis is more popular. Whether these methods work for interpreting and anticipating market movement is debatable. While investors claim to do well employing this kind of analysis, studies only show about 50% of these strategies offer a positive result. However, since investors are notoriously reluctant to share their data, the studies may not present an accurate picture.
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