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 is the essence of technical analysis.

Instead of digging into a company's financial health, technical analysts study market activity. They look at charts of past price movements and trading volume, believing that these patterns can offer clues about where the price might go next. It’s less about the 'why' behind a price change and more about the 'what' is happening right now and what has happened before.

The other main approach to analyzing assets is called fundamental analysis. A fundamental analyst is like a detective investigating a business. They read financial reports, evaluate the management team, and study the company's position within its industry to determine an asset's true, intrinsic value. They want to know if a company is healthy and has good prospects for growth.

A technical analyst, on the other hand, believes that all that detective work is already reflected in the asset's price. They operate like crowd psychologists, looking only at the supply and demand for an asset as it plays out on a chart.

Technical analysis is built on three core ideas. Understanding them is key to understanding the entire approach.

This is the cornerstone. Technical analysts assume that any information that could affect an asset's price—from earnings reports and major news to investor sentiment—is already factored into its current market price. Therefore, there’s no need to study those factors separately. All you need to do is analyze the price chart itself.

Prices don’t move randomly. They tend to follow a direction until something causes them to change course. An asset that is trending up is likely to continue trending up. The goal of the technical analyst is to identify a trend as it begins and ride it for as long as it lasts. Trends can be upward, downward, or sideways.

Market movements are driven by people, and people tend to react in similar ways to similar situations. Greed, fear, and optimism have been part of markets for centuries. Technical analysts believe that because human psychology is fairly consistent, identifiable chart patterns that have appeared in the past will likely appear again and have similar outcomes.

These three principles form the foundation for all technical analysis. By focusing on the charts, analysts aim to spot the trends and patterns that might signal the next market move.