Technical Analysis employs historical stock statistics, typically price and volume data, to predict future prices. In simple terms, a technical analyst identifies patterns in a stock's data, assumes that the pattern will repeat in the future, and places trades accordingly.
Technical analysts frequently use technical indicators to inform their trading decisions. Popular indicators include Moving Averages, MACD, RSI, etc. The fundamental assumption is that a stock's price already incorporates all available information and that it is either trending up, down, or sideways. Technical analysts believe that prices move in patterns, and chart analysis is a common tool in their decision-making process.
For instance, if a trader observes (usually through a chart) that in the last 25 instances, every time stock XYZ increased by 1%, it was followed by a downward trend, they might identify a "zig-zag" pattern. The trader now has a signal: the next time the stock rises by 1%, they plan to sell. Traders explore various patterns to guide their trading decisions.
To begin with Technical Analysis, research popular technical indicators and ensure your trading broker provides charting tools as part of your trading software.