The Fundamentals of Technical Analysis: Meaning, Uses & Advantages

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There are several methods and techniques with which traders and investors approach the process of trading and investing. These may represent tools for trading and investing, out of which technical analysis is prominent. If you have asked the question, “What is technical analysis?” you may get the answers you need to trade effectively.

Investors and traders make use of many handy hints, techniques, and trading tools to make the most of their trades, and ultimately, to make profits. If any tool is proficient enough to earn profits for an investor, you can be sure that investors will study it and use it to its full extent. One of the most commonly used indicators or tools for stock trading is called technical analysis. What is technical analysis? It is a trading process or method that is used by traders and investors based on certain stock trends and statistics. Trading is a complex activity, especially for a serious trader who wants to make returns. Technical analysis is a discipline that should be carefully studied to make the most of it in stock investing.

Article Highlights

In understanding the nuances of technical analysis, the article below will touch upon the following:

  • What is technical analysis?
  • Understanding Technical Analysis In Depth
  • Uses of Technical Analysis
  • Advantages of Technical Analysis

What is technical analysis?

Technical analysis can be called a method, a process, a tool, or even a trading discipline, that traders and investors make use of to assess investments (mainly shares and stock) and identify opportunities for trading. The crux of technical analysis lies in the analysis of statistical trends that have been gathered from investing or trading activity like volume and price shifts. Technical analysis is often compared with another kind of trading method known as fundamental analysis which focuses on the operations of a company and decides about the value of its stock. In technical analysis, chart patterns of day trading may be used as indicators to determine price movements in stocks, and consequently, trading opportunities.

Understanding Technical Analysis In Depth

By now you must have gauged the basics of technical analysis, but it is in every trader’s interest to know about it in more detail. Trading may look simple, but it takes a lot of advanced learning. Trading also involves discipline on the part of the trader and traders who wish to make their trades worthwhile may use technical analysis as an effective tool. Those who study and rely on technical analysis believe that historical trading activity and the price movements of securities are helpful indicators of the security’s price changes in the future. This means that historic stock trends play a key role in technical analysis.

So, what is technical analysis? You know some fundamentals, so let’s go a little deeper into the subject. The tools of technical analysis are used to scrutinise the ways that factors of demand and supply impact price changes, implied volatility, and volume. As we know it today, technical analysis was first introduced by Charles Dow (with the Dow Theory). In current times, technical analysis includes several signals and patterns that evolved through decades of research, to determine stock trading.

Uses of Technical Analysis

The use of technical indicators to predict volume and price movements in the stock market is not a new concept. Investors and traders can make informed and educated decisions using technical analysis. Here are some of the concept’s key uses:

  • Analysing Risk

Technical analysis helps investors and traders gauge risk through the analysis of levels of support and resistance. To guard against potential losses, traders can set up stop-loss orders based on technical analysis.

  • Reading the Market

Technical analysis helps traders determine market sentiments. Shifts in market sentiment can be detected with changes in traded volume and breakouts from steady trendlines.

  • Knowing When to Trade

Chart patterns of day trading aid traders in deciding their exit and entry points, that is, the time to sell or buy stock. Technical analysis is commonly used to deliver short-term signals for trading which may be generated from different charts. It can also help traders with their entry and exit points about whether a security is strong or weak relative to its sector or the overall market.

Advantages of Technical Analysis

The technical indicators that technical analysis generates have prominent advantages for traders:

  • Technical analysis is a quantifiable tool to analyse shifts in price movements or volume. This makes it one of the most objective methods to trade in stocks.
  • Technical analysis is used in a range of markets, like stocks, cryptocurrencies, and commodities.
  • Technical analysis proves useful for short-term traders and investors who want to profit from volatility and price changes.

Effective Forecasting

Technical analysis is an effective means of the visual analysing, interpretation, and forecasting of shifts in price and volume through the use of historical data. With careful statistical analysis, traders can make efficient decisions about trading and can act rapidly, making the most of trading opportunities. 

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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