Imagine trying to predict the weather. You could study meteorology, atmospheric pressure, and global wind patterns. Or, you could just look at the sky. Are there dark clouds gathering? Is the wind picking up? This second approach is a lot like technical analysis.

Instead of digging into a company's financial health, like you would with fundamental analysis, technical analysts focus on the charts. They believe that the patterns in a stock's price movements can give clues about where it might go next. It's less about a company's balance sheet and more about the psychology of the market itself—the collective dance of supply and demand.

Technical analysis is built on three core beliefs. Understanding them is key to understanding the whole approach.

1. The Market Discounts Everything This is the big one. Technical analysts believe that any and all information that could affect a stock's price—from earnings reports and new product launches to broad economic news—is already baked into its current market price.

The price you see on the screen is the final result of all forces of supply and demand. Therefore, there's no need to analyze those individual factors. All you need to analyze is the price itself.

2. Prices Move in Trends A core belief in technical analysis is that price movements are not random. Once a trend is established, the future price movement is more likely to be in the same direction than against it.

There are three main types of trends:

• Uptrend: A pattern of higher highs and higher lows.
• Downtrend: A pattern of lower highs and lower lows.
• Sideways Trend: When the price moves within a relatively narrow range, without a clear direction up or down.

The goal for an analyst is to spot these trends early and trade with them, not against them.

3. History Tends to Repeat Itself This principle is rooted in market psychology. The idea is that human nature is consistent. People will react to similar situations in similar ways over time. Because of this, price movements often fall into recognizable patterns.

Technical analysts have identified dozens of these patterns over many decades of market observation. They believe that by recognizing a pattern that is forming now, they can get a clue about what is likely to happen next, because it has happened before.

So, how does this compare to fundamental analysis? Think of them as two different tools for two different jobs.

Fundamental analysis seeks to determine a company's intrinsic value. It's like being a detective investigating a business, looking at its earnings, debt, management quality, and competitive position to decide what the company is truly worth. It helps answer the question: What to buy?

Technical analysis, on the other hand, isn't concerned with a stock's intrinsic value. It assumes the market price is the right price. It's more like being a surfer, studying the waves to decide the best moment to catch one. It helps answer the question: When to buy (or sell)?

Many investors use a combination of both. They might use fundamental analysis to find a great company and then use technical analysis to find a good entry point to buy its stock.

These core ideas form the foundation of technical analysis. By understanding them, you can start to see financial charts not as random squiggles, but as a visual story of market behavior.