What is technical analysis?

The technical analysis of a stock can be a powerful tool to help investors identify trend reversals and entry and exit points.

As you read Cabot newsletters and listen to investing news, you will probably hear technical analysis terms like ‘head-and-shoulders pattern,’ ‘trendline,’ ‘support and resistance,’ ‘double top’ or ‘double bottom,’ “triangle,’ and ‘gap.’ These are all different trading and movement patterns, and understanding them can be the difference between a successful and a failed investment.

Learning about these basic formations and how to read stock charts will make you a better, more profitable investor. Even a basic understanding of these charts can significantly improve your investing results. How does it work?

Technical analysis focuses on the price and volume activity of a stock. In its purest form, technical analysis assumes that all the fundamental factors of a company are reflected in the price of its stock. Technical analysis studies the market supply and demand in an attempt to identify where a stock’s price will go in the future.

By contrast, fundamental analysis involves analyzing the characteristics of a company to estimate its value. This includes examining a company’s financial statements and financial health, its management and competitive advantages, and its competitors and markets.

The key is to use technical and fundamental analysis together. A great chart is nice to look at, but the company may not be worth investing in unless it also has a terrific long-term growth story. Likewise, a company may have a terrific fundamental story, but its chart (which is really what you’re buying) may not look so good.

Only if both the technical and fundamental analysis looks outstanding should you consider a stock for purchase. 

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons.