What exactly is technical analysis? Just like weather forecasts

The technical analysis is just like the weather forecast. The latter is useful because it helps us to prepare for what is likely. If the forecast calls for rain, we bring our umbrellas with us when we go out. We know that we might not need these things, but more than likely we will and we like to be prepared.

Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time.

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity.

Indicators

In general, technical analysts believe that the historical performance of stocks and markets are indications of future performance. They usually look at the following broad types of indicators:

• Price trends

• Chart patterns

• Volume and momentum indicators

• Oscillators

• Moving averages

• Support and resistance levels

Other things need to know

• Technical analysts use price and volume to determine more about the factors that cause market changes, such as fear and greed, trends, reversals, support, and etc. Technical analysis also draws heavily from the experience and intuition of the person doing the analysis.

• Technical analysis requires experience and knowledge about the kinds of markets being charted - stocks are different from commodities which are different from mutual funds, large stocks are different from small stocks, etc. Just like a forecaster from Florida that moves to Alaska will need time to become familiar with Alaska's weather patterns.

• Don't believe technical analysis can somehow control the stock pieces or the predictions are always accurate. Technical analysis may work well when conditions aren't changing dramatically, but it's not easy to predict exactly when big changes will occur.

• Both weather forecasting and technical analysis work well for the "mid-sized view.”

While predicting the weather for a large city is possible, predicting things for a city block is very hard. Similarly, second-by-second technical analysis can be extremely tricky; daily and weekly analysis is more reliable. Conversely, predicting weather for the country as a whole and predicting the market as a whole are too broad to be useful.