Charts are the one and only resource for technical analyst. These charts present the history in a visual way in order to allow the technician to understand the past and forecast the future price movements. There are many methods of technical analysis and some of them are multiple centuries old according to wikipedia. All methods are based on price movements. Some examples are price patterns, technical indicators, support and resistance, Gann, Japanese candlesticks, Elliott wave and many more. We will describe these examples below.

Why does technical analysis work?

The reason why past movement has predictive value for future movement is because of mass psychology. The basic premise behind technical analysis is that current behaviour of people will be repeated in future. At certain points of time in the past, large group of people had certain feelings about the markets (sociology or socionomics), resulting in certain patterns. These feelings can be positive and optimistic (bullish), neutral or negative or full of fear(bearish). When the same patterns occur at this very moment, you can expect that large groups of people have similar feelings as in the past and that stocks will move likewise.

In the end, no single person or government has the power or financial capacity to cope with these large groups of people, although they are capable of resist it for a short period of time.

Some other technical analyst have another reason to believe that technical analysis works. Their  opinion is that all relevant information is reflected in the price of a stock. It doesn’t make sense to them to do a fundamental analysis or to keep an eye on the news. All information is already processed by the financial markets.

How do stocks move?

All stocks, indices, currencies and commodities move in trends. This means they move down, sideways or up. Charles Dow put this theory forward in 255 Wall Street Journals editorials. The name Dow is still used a lot in the financial markets because on of the major indices is called after him, the Dow Jones.

The persons who are able to determine the main trend are the most successful in stock trading. The challenge is to define and determine the trend, which is exactly the job of a technical analyst. Some of the methods he uses to execute his technical analysis are described in this section.