Technical analysis strategies are utilized by investors who feel that the past price levels of stocks will ultimately predict how those stocks will behave in the future. There are many of these strategies, some of which are concerned with support and resistance price levels. Technical analysis strategies can be based on stock price patterns, which, according to technical investors, repeat themselves over time. In other cases, investors rely on techniques that combine fundamental analysis — which studies the companies that issue stock — with technical techniques when it comes time to choose stocks.
For some analysts, the particulars of the companies that issue equity on the stock market are ultimately irrelevant. These people tend to believe that all of the information needed to pick successful stocks can be found in the history of their stock prices. According to technical analysts, certain patterns emerge upon examining stock prices that will eventually repeat themselves over time. Such patterns are the basis for most of the different technical analysis strategies that are available to investors willing to believe in them.
One of the most common technical analysis strategies relies upon support and resistance levels. These levels are the points at which stock prices will sustain themselves over time. If a stock falls to a level where it has proven it will hold its price in the past, it has reached the support level and investors will buy. On the other hand, if the price rises to that level from a lower price, investors should be wary about any further price improvement and be ready to sell.
Many investors who rely upon technical analysis strategies are willing to rely upon stock chart patterns. Stock charts consist of lines depicting the rising and falling prices of a stock over time. These visual representations will eventually reveal certain patterns that, investors believe, can be used to predict future movement. For example, a “W” pattern resembles the English letter “W” and consists of a stock falling to a low level, rising not quite back to its previous level, and falling yet again before rising one more time to its previous high. Investors who see this pattern forming might wait until the second price drop before buying the stock.
Not all technical analysis strategies completely ignore the companies that issue the stocks in question. Some strategies incorporate bits of fundamental analysis to balance reliance on technical indicators. These methods tend combines some technical analysis along with financial information from the issuing company like earnings and profits to deliver a complete overview of a stock.