What Technical Analysis Really Claims
The three assumptions TA rests on — and an honest look at where it helps and where it fools you.
Technical analysisStudying price and volume to forecast moves. (TA) is the study of *price and volumeThe number of shares or contracts traded in a period.* — the chart itself — to make decisions, rather than studying the company’s business (that’s fundamental analysisValuing a company from its business and financials.). A technician doesn’t ask “is this a good company?” but “what is the price doing, and what does the crowd’s behaviour suggest next?”
- Price discounts everything — all known information (news, earnings, hopes, fears) is already reflected in the price, so the chart is the net result of everything participants believe.
- Prices move in trends — once a direction is established, it’s more likely to continue than reverse, until something clearly changes it.
- History tends to rhyme — because human psychology (fearThe two emotions that move markets and ruin accounts. and greedThe two emotions that move markets and ruin accounts.) is constant, recognisable patterns recur over time.
Where it helps: timing entries and exits, defining risk (where you’re wrong), and reading sentiment. Where it fools you: when you see patterns in randomness, or trust a signal without considering context, volumeThe number of shares or contracts traded in a period. and the bigger trendThe prevailing direction of price: up, down or sideways..
Is technical or fundamental analysis better?
They answer different questions — fundamentals say *what* to buy (is the business sound and fairly priced?), technicals say *when* (is now a good entry, and where am I wrong?). Many investors use fundamentals to choose and technicals to time. Neither is universally “better.”