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What is Technical Analysis? How Is it Different From Fundamental Analysis?

Technical analysis is a method of evaluating stock prices by relying on market data, such as charts of price and volume, to help predict future market trends. Investors who rely on technical analysts strive to accurately predict the future price of a stock by looking at its historical prices and other trading variables.

Technical analysis hinges on the belief that psychology influences trading in a way that enables predicting when a stock will rise or fall.

Bob Prechter, Elliott Wave International's founder and president, has called the Elliott Wave Principle “the purest form of technical analysis.” He explains, “The Wave Principle is a catalog of the ways that the crowd goes from the extreme point of pessimism at the bottom to the extreme point of optimism at the top. It is a description of the steps human beings go through when they are part of the investment crowd, to change their psychological orientation from bullish to bearish. Since people don’t change much, the path they follow in moving from extreme pessimism to extreme optimism and back again tends to be the same over and over, regardless of news and extraneous events.” 

Elliott Wave analisys and technical analysis differs from fundamental analysis in that fundamental analysis relies on the belief that stock markets and the people trading stocks are rational. We at Elliott Wave International believe that — as human beings — investors and traders are not rational, rather they follow similar “paths.” We refer to this as herding, and it is key in the understanding of technical analysis.

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