Technical analysis
Technical analysis is a method of evaluating securities by studying past price movements and trading volume rather than a company's financial fundamentals. Technical analysts use charts and patterns to forecast where prices are likely to move next.
Technical analysis starts from the premise that market prices themselves carry information. Rather than digging into earnings, balance sheets, or management quality, a technical analyst (or chartist) studies historical price and volume data, looking for trends and recurring patterns that suggest where a stock is headed.
The chartist's toolkit includes support and resistance levels (price floors and ceilings where buying or selling pressure tends to appear), moving averages that smooth out day-to-day noise, and named chart patterns such as head and shoulders, saucers, and trendline breakouts. Volume matters too: a price move on heavy volume is treated as more meaningful than the same move on light trading.
Technical analysis is the counterpart to fundamental analysis, which values a security based on the underlying business. The two approaches also answer different questions — fundamental analysis addresses what to buy, while technical analysis addresses when to buy or sell. Critics point to the efficient market hypothesis: even its weak form holds that past prices are already reflected in current prices, implying chart patterns should not produce reliable excess returns.
The Series 7, Series 65, and Series 66 exams all test technical analysis. Expect questions identifying what a chartist studies, interpreting support and resistance or specific patterns, contrasting technical with fundamental analysis, and connecting technical analysis to the efficient market hypothesis.
Key takeaways
- Technical analysis forecasts price movement from historical price and volume data, not business fundamentals.
- Core tools include support and resistance levels, moving averages, trendlines, and chart patterns.
- Fundamental analysis asks what to buy; technical analysis asks when to trade.
- The efficient market hypothesis, even in weak form, argues that past price data cannot reliably predict future prices.
- The Series 7, 65, and 66 exams test chart patterns, support and resistance, and the technical-versus-fundamental distinction.