Technical Analysis in Investing: What It Is and How It's Used

By Kristi Waterworth – Updated Jul 30, 2025 at 6:36 PM EST | Fact-checked by Frank Bass

Key Points

Technical analysis predicts stock movements using historical data, focusing on price and volume.
It's mainly used for short-term trades but can complement long-term fundamental analysis.
Limitations include potential bias and the unreliable nature of solely using past data for prediction.

There are lots of ways to evaluate stocks as potential investments, including the use of market activity to predict future movements. This is called technical analysis, and there's a subset of investors who rely heavily on it. Read on to learn more about this type of analysis.

Chess pieces standing on digital financial charts. — Image source: Getty Images.

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What is technical analysis in investing?

Technical analysis is one way to predict stock movements based on historical stock data. So, instead of looking at how a company is performing, pure technical traders look only at stock charts and the stock's performance, including its price and trading volume.

The goal is to identify pricing trends and patterns to predict future opportunities. Technical analysis is generally used for short-term trading, often by day traders to pick up stocks they hope to resell quickly. However, it can also be used in combination with fundamental analysis to better understand both the company's and the stock's behaviors.

Technical analysis versus fundamental analysis

Here at The Fool, we generally teach how to examine a stock for the long term, and this includes fundamental analysis. That's when you look at a company as if you were going to invest in the business because, frankly, that's what buying a stock for the long term really is. You're buying a little part of the business, so you need a company that can go the distance.

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In technical investing, you use technical analysis to buy stock based solely on its price and price potential, using historical trends. It can work if you have the right tools and are prepared to accept heavy losses when you're wrong.

Technical analysis is not for the faint of heart or for people who have a low risk tolerance. However, it can also be used with fundamental analysis to help predict where stocks you're holding long term may head in the future.

Common technical indicators

Technical analysts look at all kinds of patterns and trends, but some of the most common are also the most basic. When put together, they can create complicated systems that allow technical analysis to take place in surprisingly sophisticated ways.

These include:

Pricing trends
Charting patterns
The amount and rate at which a stock's price changes
High/low bands between price extremes, called oscillators
The average changes in a stock price over time, called moving indicators
Specific types of price pauses, called support and resistance levels

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Limitations of technical analysis

Although many investors dabble in some form of technical analysis, often coupled with fundamental analysis, it's important to understand the limitations of this kind of examination. When we're investing, we have to be honest with ourselves about how and why we've chosen the stocks we have and not be blinded by our own biases.

Although fundamental analysis has its own flaws, it's much harder to miss with a stock over a five- or 10-year time horizon. When it comes to technical analysis, it's like jumping out of a plane and landing in the center of a trampoline -- everything has to be exactly right for the calculations to work out because the time horizon is so short.

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Some academics also believe there's literally no value in the historical data that technical analysts use, but this is a somewhat flawed argument since the same could be said about past business performance. People do tend to repeat behaviors over and over, which is what technical analysis considers. However, it's unlikely for all the elements that create a behavior to be exactly in line again and again.

Another argument against technical analysis is that results may be more of a self-fulfilling prophecy than an actual result of the analysis, since many technical analysts can influence prices up or down based on their behavior. If everyone is making the same calculations based on the same observations, it's easy to accidentally skew the results in the short term.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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