Technical analysis
Sometimes known as ‘charting’, technical analysis aims to predicting short to medium term share price movements based on trends in volumes and prices. The idea behind technical analysis is that historical price movements can indicate the psychology of buyers and sellers and therefore offer an insight into what might happen in the future.
Technical analysts often use share price charts and various ‘indicators’ to help them work out which way prices are headed. Computer programs and packages have typically replaced much of the leg work, which once required drawing charts by hand, although these, just like humans, are fallible, too.
Technical analysts tend not to be concerned with the underlying business of a company, only with price movements in its shares. The approach is typically a short to medium term trading strategy that aims to time entry into and out of shares or markets. Day traders sometimes use technical analysis, because it is shorter term and involves focusing on price movements rather than any assessment of a company itself.
WD Gann was an early technical analyst and his record is described in the next section.
Further Reading
- We recommend this comprehensive book on technical analysis by Stephen Achelis.
- Burton Malkiel's A Random Walk Down Wall Street is more than just a critique of charting but he does show, in great detail, how the evidence that anyone can predict future share prices is, at best, suspect.
