Imagine trying to predict the weather. You could study meteorology, atmospheric pressure, and global wind patterns. Or, you could just look outside at the clouds. Technical analysis is a lot like looking at the clouds. It’s a method for forecasting the direction of prices by studying past market data, primarily price and volume.

Instead of digging into a company's financial statements to find its 'true' value, technical analysts look at charts. They believe that the collective actions of all the buyers and sellers in the market are captured in the price movements. By identifying patterns and trends in these movements, they aim to predict what might happen next. The entire approach rests on three core ideas.

Technical analysis is built on a few foundational beliefs about how markets work.

1. The Market Discounts Everything

This principle assumes that at any given moment, a stock's price reflects all available information. This includes everything from company earnings and management changes to broader economic news and market sentiment. The idea is that all this information is priced into the stock, so all you need to analyze is the price itself.

2. Price Moves in Trends

Once a trend is established, the future price movement is more likely to continue in the same direction than to move against the trend. A key part of technical analysis is identifying these trends as early as possible. There are three main types:

3. History Tends to Repeat Itself

This is the pillar that deals with market psychology. Because people tend to react to similar situations in similar ways, repeatable patterns emerge on price charts. Technical analysts study these historical patterns to find clues about future market movements. The logic is that if a certain pattern led to a price increase in the past, it's likely to do so again.

Technical analysis is often contrasted with fundamental analysis. While technical analysts focus on charts, fundamental analysts study a company's financial health. They look at revenues, earnings, assets, and liabilities to determine a company's intrinsic value. A fundamental analyst asks, 'Is this a good company to own?' A technical analyst asks, 'Is now a good time to buy or sell this stock?'

The two approaches aren't mutually exclusive. Many investors use both. They might use fundamental analysis to identify strong companies and then use technical analysis to find the best time to enter or exit a position.

Understanding technical analysis provides a different lens through which to view the market. It focuses on the 'how' and 'when' of trading, using the market's own history as a guide.