Technical analysis is a method of forecasting the future direction of prices by studying past market data, primarily price and volume. Instead of digging into a company's financial statements to find its intrinsic value, technical analysts look at charts. They believe that all the information about a security is already reflected in its price.

Think of it this way: a meteorologist studies past weather patterns to predict if it will rain tomorrow. They look at data like temperature, humidity, and barometric pressure. They aren't studying the fundamental chemical composition of water vapor. Technical analysis is similar. It's the study of market weather patterns to see what might happen next.

The main alternative to technical analysis is fundamental analysis. The two approaches ask different questions.

Fundamental analysis asks, "Why is this asset worth what it is?" It involves looking at economic factors, a company's management, and its financial health—things like revenue, earnings, and assets. A fundamental analyst is like a detective investigating a company's true value, hoping to find assets that the market has underpriced.

Technical analysis asks, "What is happening with the price?" It focuses on the patterns of supply and demand in the market, believing that these are the ultimate drivers of price. A technical analyst is more like a crowd psychologist, trying to gauge the mood of the market to anticipate its next move.

Many traders use a combination of both. They might use fundamental analysis to decide what to buy and technical analysis to decide when to buy it.

Technical analysis is built on three core principles. If you accept these ideas, the logic of technical analysis follows naturally.

It’s a powerful claim. It suggests that the combined knowledge of every market participant is reflected in the last traded price. The chart, then, becomes a complete story of the asset.

The main goal of a technical trader is to identify these trends early and trade in their direction. There are three types of trends: uptrends (a series of higher highs and higher lows), downtrends (lower highs and lower lows), and sideways trends (a price moving in a relatively stable range).

To study price movements, technical analysts use a few basic tools. The most fundamental of these is the price chart.

Charts visually display the historical price action of an asset, making it easier to spot trends and patterns. While there are several types of charts—like line, bar, and candlestick charts—they all serve the same purpose: to make sense of price history.

Analysts also use technical indicators. These are mathematical calculations based on price, volume, or open interest. They're used to forecast price direction. You can think of them as lenses that help focus on specific aspects of the price action, like momentum or trend strength. We will explore specific charts and indicators later on.

This introduction lays the groundwork for understanding how traders use past data to inform future decisions. By focusing on price action and market psychology, technical analysis offers a distinct yet complementary perspective to fundamental analysis.