Books are filled with definitions and interpretations on technical analysis.  A significant part of technical analysis is the art of studying the past, attempting to identify a pattern or event that seems to represent or reflect the market being studied, and then believing that it will work with some certainty in the foreseeable future.

My definition for technical analysis and my adherence to using it comes from a belief that everyone needs something to believe in or rely upon.  I believe in technical analysis because of its close relationship to the supply and demand of the market.  Fundamental analysis, which is by far a more popular method of analysis, is generally flawed in that it does not address the issue of ‘when.’  When should I buy or when should I sell?  Researching the hundreds of different fundamental ratios is the full-time job of thousands of securities analysts.  However, think about this simple fact.  Almost all fundamental ratios involve price.  So why not analyze price?  Most forms of technical analysis do just that.

Is technical analysis the same as market timing?

Sometimes it is, sometimes it isn’t.  Market timing has received a bad rap, especially by those who believe it is a process by some who blindly follow some over-optimized mechanical system without utilizing money management or an asset commitment plan.  In that regard, its bad rap is appropriate.  The analysis of risk and reward is not market timing in the sense that many think of when using that often misused term.  Determining when the market has too much risk is not market timing, but prudent and discretionary investment decision making.  Next time you hear a brokerage firm analyst mention that no one can time the market, or that technical analysis does not work, ask to see his/her record during the bear markets of 2000 – 2002 and 2007 – 2009.  Heck, he/she probably wasn’t a stockbroker then anyway.  I hate it when I call salesmen stockbrokers.  They are not stockbrokers, as that is what the company they work for is called; they are salesmen for a stockbroker.  I feel better now.

What is Technical Analysis?

Simply put, "Technical Analysis" is the forecasting of future investment price movements based on an examination of past price movements.

Like weather forecasting, investment technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time.

Technical analysis uses a wide variety of charts that show price over time.

Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of theoretical market supply and demand.