What it means
Technical analysts look at how prices have moved rather than at a company's profits or balance sheet. They believe that all known information is already reflected in the price, and that prices tend to move in trends that persist until something changes.
The book by Edwards and Magee, first published in 1948, became the standard text on the subject. It explains how to read charts using ideas such as support (a price level where buyers tend to step in), resistance (a level where sellers tend to appear) and trendlines.
It also catalogues chart patterns that traders look for, including head and shoulders, triangles, flags and double tops. Each pattern is said to show a battle between buyers and sellers, with a break above or below a key level suggesting the next move.
The approach draws on Dow Theory, an older idea that markets move in primary trends with secondary corrections within them, and that the averages should confirm each other. Many modern indicators, such as moving averages, are built on the same thinking.
Critics point out that patterns can be subjective, that two analysts may read the same chart differently and that academic research has found mixed evidence for chart-based strategies. Supporters answer that technical analysis is a framework for managing risk and timing, not a crystal ball.
Business professionals meet the subject when company shares, currencies or commodities are discussed in terms of "breakouts" or "support levels". Knowing the basics helps in understanding the language even for those who prefer fundamental analysis.
In practice
Real-world examples.
Example
A retail investor studies a chart of a technology share that has repeatedly bounced off $45. She treats $45 as support, buys near it and sets an exit order just below in case support fails. She also checks that trading volume rose on the bounce, since strong volume gives the signal more weight.
Example
A currency trader notices a currency pair break above a long-term resistance level on high volume. He treats the move as a sign of a new uptrend and adds to his position. Volume was also high, which he sees as confirmation that many traders are acting on the same level.
Example
A fund manager who normally uses company accounts reads the book to understand how technical traders think. He realises that heavy selling at a round number may be driven by chart levels, not news. That insight helps him time his own purchases, even though he still bases his decisions on company fundamentals.
Formula
Calculation
Price target after a head and shoulders breakdown = Neckline - (Head peak - Neckline)
This is a common rule of thumb, not a guarantee. A share forms a head peak at $60 with a neckline at $50, then closes below $50. The pattern height is $60 - $50 = $10, so the projected target is $50 - $10 = $40. A trader might place a stop-loss order above the neckline in case the signal proves false.Case study
Seen in the real world.
Meridian Trading Club is an illustrative, fictional group of amateur investors who decided to test chart reading. Over a year, members recorded every pattern they spotted and what happened next.
The results were mixed: some patterns led to the expected move, many did not, and the club found that disciplined exits mattered more than the pattern itself. Members who always set a stop-loss limited their losses best.
In this fictional story, the club concluded that technical analysis was a useful tool for timing and risk control, but that it worked best alongside an understanding of the business. The main lesson was to treat any pattern as a probability, never a certainty. Members also found that keeping a written journal of each trade, with the reason for entry and the exit level, improved their results more than any single pattern. The journal exposed which of their own biases led to avoidable mistakes.
Watch out
Common mistakes.
- Treating chart patterns as guaranteed predictions rather than probabilities.
- Using technical analysis without any plan for limiting losses if the signal fails.
- Reading patterns into every chart, which leads to seeing signals that are not really there.
Questions
People also ask.
Who wrote the classic book on technical analysis?
Robert D. Edwards and John Magee wrote it, and it was first published in 1948 under the title Technical Analysis of Stock Trends.
Is technical analysis the same as fundamental analysis?
No, fundamental analysis studies a company's financial health and prospects, while technical analysis studies price and volume behaviour. Some investors use fundamentals to choose what to buy and charts to decide when.
Does technical analysis work?
Evidence is mixed, and many professionals use it as a supporting tool for timing and risk control rather than as a stand-alone method. The honest answer is that it works for some traders, who combine it with strict discipline, and not for others.
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