What Is Technical Analysis?
Technical analysis is the practice of making trading decisions from price and volume rather than from a company's finances or an economy's condition. It assumes that the prices people reacted to before are prices they will react to again, and that most of what can be known is already in the price.
Technical analysis is a large word for a small boundary: you are reading the chart rather than the company. This page covers what that commits you to, what the tools actually are, and the question everyone asks about whether it works.
How it works
The entire input is price and volume. Not earnings, not interest rates, not what a company announced. Those things move price, and technical analysis reads the result rather than the cause.
That is the boundary, and it is a choice rather than a claim that the other things do not matter.
The one assumption
Prices that mattered before tend to matter again. Strip away every tool and that is what is left — the belief that a chart carries some memory of what people did at particular prices.
If that assumption is false, none of the rest works. It is worth holding it consciously rather than absorbing it.
Three families of tool
Levels — horizontal prices where something happened. Support and resistance, zones, trend lines.
Structure — the pattern of highs and lows. Market structure, chart patterns.
Indicators — arithmetic on price. Moving averages, RSI, MACD.
Almost every named method is a combination of those three.
The thing about indicators
Every indicator on that chart is computed from the closes already visible. A moving average is their mean. RSI compares their up moves to their down moves. MACD subtracts one average from another.
Which has a consequence people rarely state: adding five indicators does not add five sources of information. It adds five views of one source, and when they agree that is not confirmation — it is arithmetic agreeing with itself.
The only common input that is not derived from price is volume, which is why it earns its place.
Why it works at all
The honest mechanism is not that a line has power. It is that an obvious level is obvious to everybody.
People place orders at prices they can see. Enough orders at one price and price reacts there — which makes the level look predictive, when what actually happened is that a crowd acted on the same picture.
That explains the pattern in the failures too. Clever levels almost nobody else drew tend not to work, and the clean obvious ones do. If prophecy were the mechanism, it would be the other way round.
What it actually produces
Not a forecast. A pair of prices.
Somewhere to act, and somewhere that says the reason for acting has stopped being true. The second one is the valuable half, because it turns an opinion into a position with a known cost — which is the entire content of the risk management page.
Read that way, the question “does technical analysis predict the market” is the wrong question. It does not, and it does not need to.
What the chart cannot see
Worth knowing early, because it explains a particular kind of bad day.
Technical analysis reads what has already happened. A scheduled event that has not happened yet leaves no trace on the chart — an earnings release, a central bank decision, an inflation number. The chart before one of those looks exactly like the chart before an ordinary hour.
So the level is real and the timing is not yours. A perfectly drawn support level in front of an 8:30 release is not a bad level; it is a good level about to be handed a piece of information it knows nothing about.
The practical version is not a method, it is a habit: check whether anything is scheduled before you commit to a read. Most days nothing is. On the days something is, the honest position is that the chart is not the thing in charge.
A worked example
You look at a chart with nothing on it. Highs, lows, and a level price stopped at twice.
You form a read. The lows are rising, so the trend is up, and the level is where a pullback would plausibly stop.
You name the invalidation first. Below the last higher low, the read is wrong. That is a specific number and it exists before any trade does.
You size the position from that distance, not from how convincing the chart looks.
Then you wait. Most of technical analysis is the part where nothing is done, and it is the part that does not appear in videos.
The original data
Across our study of 24,971 trading videos, 588 cover technical analysis. The median one gets 6,739 views, 73% never pass 50,000, and the median length is 13.8 minutes.
The corpus carries description text for 142 of those 588, and across those 142, zero mention invalidation, failure, or what a bad read looks like.
Zero out of a hundred and forty-two, on the discipline whose only genuine output is a price at which you were wrong.
When it fails
Two honest readings of one chart
This is the deepest problem and it does not go away. A resistance level is a reason to sell; a higher low on the same chart is a reason to buy. Both readings are correct descriptions.
Nothing in the method arbitrates between them. What decides is which one you name in advance and what price would prove it wrong.
The chart stops mattering
On some days price goes through everything. The levels were real and the orders behind them were not enough. Technical analysis is a claim about ordinary conditions, and those are not all the conditions there are.
You added tools until one agreed
Five indicators on one chart will always contain a signal for whatever you already wanted to do. It feels like rigour and it is the opposite, for the reason in the indicators section: they are not independent.
You did it with the ending visible
Every chart is readable once it has finished. The test for any method on this site is whether it survives the right-hand side being covered.
Related
Price action is this with the indicators removed, and the fastest route to the readings that do the work.
Support and resistance is the oldest of the three families and the one everything else is built on.
And risk management is what turns a read into a position, which is where any of this becomes worth doing.
The thing I would tell someone starting is that this does not tell you what will happen, and anyone selling it that way is selling something else. What it gives you is a place to act and a place to stop, both decided before you have money on the line. That sounds like a downgrade from prediction and it is worth more, because the second one is a decision you can actually make well and the first one is not available to anybody.
— Michael Whitman, from this video
This page is educational, not financial advice. Test every idea on your own charts before risking money.