Technical analysis is the practice of predicting the future using historical price and volume data. Using principles set out by Charles Dow in the late 1800s, technical analysis involves finding patterns and forecasting future prices. While that may seem confusing, it is fairly straightforward in concept.
In this guide, we’ll go over:
- What Is Technical Analysis?
- Who Uses Technical Analysis
- How to Do a Technical Analysis of Stocks
- Technical Analysis vs. Fundamental Analysis
- How to Show Technical Analysis Skills on Your Resume
- Related Analytical Skills
What Is Technical Analysis?
Technical analysis uses a stock or security’s previous performance to identify trends and patterns and determine how it will behave in the future. This type of analysis can be done on any security that is traded and has historical data available. This includes futures, commodities, currencies, bonds, and stocks.
Technical analysis can’t be used to predict performance for initial public offerings (IPOs) because there is nohistorical data yet. However, this type of analysis is incredibly common when trying to forecast performance for “forex” (foreign exchange markets that trade national currencies) and commodities (raw materials such as fossil fuels, minerals, and agricultural goods).
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Who Uses Technical Analysis?
Technical analysis is a tool used primarily by analysts — investment bankers who look at market trends to advise and guide their clients. However, understanding technical analysis can be useful for investors of every type, from personal investors to professional investors working for large investment banking companies.
Anyone who buys or sells stocks may even do a lighter form of technical analysis without realizing it. For example, if you’re choosing between two stocks to invest in, and one has been trading very poorly for several months while the other has a lot of upward momentum (rapid price increases), you may choose the stock with upward trends, assuming it will continue that way even for the short-term. In that case, you’ve just used a form of technical analysis to inform your investment.
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How to Do a Technical Analysis of Stocks
At face value, technical analysis is relatively simple: Choose a specific stock and look for price change patterns over a period of time to determine if the stock is a good investment for the future. However, it can become a little more complicated in practice.
There are two key parts that you need to understand before you can get started: the core principles and certain key aspects of a stock.
Core Principles of Technical Analysis
Much of the theory of technical analysis was put forth by Charles Dow near the end of the 19th century. “The Dow Theory” is a broad hypothesis on stock market trends, but certain aspects of it create the foundation for technical analysis. Some of the important tenets of the Dow Theory are:
Everything is discounted by market action.
A security’s price is inherently reflective of all information available that could affect that market. For example, the issuing company’s financial standing is reflected by the market price. So, analyzing a stock based on the company’s financial information or the economy is fruitless — those factors are already taken into account by the market itself.
Prices have trends.
Stock prices are not random; they trend up, down, or horizontally (a flat trend).
History often repeats itself.
Investor behavior tends to repeat itself — the habits of past investors often arise in current and future investors. These repeating investor habits are what create price trends and allow technical analysis to work.
Key Aspects of a Stock
So, technical analysis involves identifying trends, but trends of what? Most of the important things to look at for analyzing a stock can be found on a stock chart.
- Market price
- Open high/open low
- Closing high/closing low
- 52-week high/low
Additionally, most places you can view stock charts online allow you to customize how far back you see: one week, three months, six months, etc. This allows you to choose your specific timeframe for analysis.
Once you understand the principles of technical analysis, and you know what parts of a stock chart to pay attention to, it’s time to look for trend indicators. This involves looking at the specific timeframe and searching for patterns.
Some indicators of a trend that analysts look for include:
- Patterns: Any distinctive or clear pattern the stock chart shows
- Cycles: A period of time that a price trends in one way or another, after which it changes direction
- Resistance: Price levels that could inspire a large increase in selling the stock
- Support: Price levels that could inspire a large increase in buying the stock
One example of a downward trend could be that each day, the daily high for the stock price never reaches the height of the previous day, and the daily low consistently is lower than the previous day’s low. So while the average price per day may not be that much lower day after day, looking at the highs and lows for each day can show a consistent downward trend for the stock. If this is not cyclical activity that happens every few months, it is likely the trend will continue unless something in investor behavior changes.
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Technical vs. Fundamental Analysis
Technical analysis is only one way to try to predict the future of a stock or security. The other main form is fundamental analysis. Fundamental analysis looks at a stock or security’s fundamentals: industry trends, valuation, revenue, market conditions, and the state of the economy at-large. These fundamental factors indicate a security’s intrinsic value, or the value of the stock currently based on the issuing company’s financial status and the market as a whole.
Both approaches have their shortcomings: Technical analysis assumes the market reflects any and all macroeconomic changes and trends, which may not always be the case. Whereas fundamental analysis ignores the real patterns and cyclical behavior of investors. Most analysts rely on both approaches to predict future stock performance.
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How to Show Technical Analysis Skills on Your Resume
Technical analysis is an incredibly important skill for anyone who works with buying and selling securities. If you have work or internship experience that involved doing a technical analysis of a stock or commodity, mention that in your resume.
Otherwise, if you have personal investing experience that included looking at trends in prices for your own investment portfolio, that can be a great thing to discuss in your cover letter. For example, you could talk about how you identified a slight upward trend for a stock early on, and your analysis proved correct and paid off big!
Ultimately, you can include “technical analysis” in your skills list on your resume. Finance professionals will understand what that entails. If you are also familiar with fundamental analysis, you could include “technical and fundamental analysis skills” in that section.
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Related Analytical Skills
Technical (and fundamental) analysis is all about predicting the future — that is a core function of investment bankers and investors alike. Some related analytical skills that can help you predict the future include:
- Using compound annual growth rate (CAGR) to understand how an investment is growing over time
- Calculating a discounted cash flow (DCF) valuation to determine if an investment is worthwhile in the future
- Understanding key terms and concepts, such as common stocks
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