Level 1 CFA® Exam:
Technical Analysis - Introduction

In this lesson, we are going to talk about technical analysis and some concepts it is connected with. We're also going to compare technical analysis with fundamental analysis.

Technical analysis is a school of market behavior analysis that mostly uses price charts and its purpose is to project future price movements. The proponents of technical analysis use data on price, volume, and the number of open positions in the case of futures markets.

Technical analysis is based on 3 assumptions:

1. the market discounts everything,
2. prices follow trends,
3. history likes to repeat itself.

The first assumption means that a market price is already adjusted for both rational and irrational factors that may affect it. Everything an investor should know about an analyzed asset is there in its price charts. The concept of trend is fundamental to technical analysis. We're going to define it later. Now, let's imagine a trend as a direction in which princes in the market are heading. Technical analysis assumes that prices tend to keep the direction of their movement rather than change it. This is what we mean when we say prices follow trends.

The third assumption is based on the fact that price movement sequences in the markets will recur in the future or that past price movement sequences can happen again today. Such recurring price sequences are called price patterns or formations. Price patterns are an effect of investors' activity in the markets and their behavior and expectations, which is why according to technical analysts price patterns tend to repeat themselves.

Before we move on, let's first discuss what factors are key for fundamental analysis on the one hand and technical analysis on the other. This will help us understand the differences between the two schools of analysis.

The fundamental analyst seeks to determine the real intrinsic value of a financial instrument, e.g. a specific share, by considering all the factors that may affect it, such as the political and economic situation in a country, the condition of a sector, the financial standing of a company, its growth perspectives, etc.

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