In the stock market, technical analysis is the study of the market itself, separate from fundamental analysis, which focuses on a company's financial condition.
Technical analysts typically use price and volume charts, looking for patterns that suggest future behavior.
For some investors, the classic work is the nearly 700-page "Technical Analysis of Stock Trends," published in 1948 by Robert D. Edwards and John Magee.
Others rely on calculations of price changes, such as rate of change over particular time spans, or more complex calculations, such as stochastics or MACD, which stands for moving average convergence-divergence.
It's easy to get lost in the arcane and sometimes overly technical approach to technical analysis.
Investor's Business Daily's technical analysis focuses on the basics, which, properly understood, can give you a lot more insight than a tangled forest of competing indicators. IBD relies on the identification of proper bases (which are areas of price consolidation), the relationship of price and volume, the use of moving averages, as well as points of support and resistance.
IBD uses fundamental analysis to determine what to buy and technical analysis to decide when to buy and when to sell.
Technical analysis works because the interaction of price and volume reveals the trading of institutional investors, who must buy and sell in large volume over time to enter and exit positions.
A careful study of a stock chart — showing high, low and closing prices and the corresponding volume for a day or week — will show signs of accumulation or distribution by large investors. It will also reveal points at which a price level will act as support, providing a safe entry point to the investor who understands stock charts.
The following articles offer a more detailed look at how IBD readers use technical analysis to their advantage: How To Invest: Long Cup Bases Can Lead To Big Gains Spotting The Buy Point: Apple's '07 Breakout How To Trade: Why Do We Care About Bases?
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