How do I use technical share analysis?

Technical analysis doesn’t focus on a company’s credentials but on share price charts, their patterns and formations, to help predict future share price movements.

There are many ways to analyse an investment and the right approach for you will depend on your timeframe, personal circumstances, risk appetite and objectives.

Some investors believe that if they know what they’re looking for - which stocks to buy or sell - then technical analysis can help them decide when to do it.

Charts illustrate movements in a company’s share price, providing insight into ‘the mind of the market’, how share prices fluctuate and react to different news, events and economic cycles.

Reading charts

There are several types of charts that investors use to conduct technical analysis but the most simple is a line chart.

The image below shows the performance of a company’s shares over a one year period.

Some investors believe that shares are likely to keep moving in the direction of a ‘trend line’, such as the one in the chart below. The line connects recent troughs in the share price.

A sequence of rising troughs is viewed as a positive trend, while a sequence of falling peaks is a negative trend.

Investors might wait until a stock on an upward trend starts rising from a trough before they buy, rather than trying to predict when the stock has reached the bottom of the trough.

Charts shown are for illustrative purposes only and do not represent a recommendation by CommSec MyWealth to buy, sell or hold any security.

Support and resistance

Another pattern that technical investors sometimes look for is lines of support and resistance.

A line of support, in red in the chart below, would mark a price that a stock is unlikely to fall below, based on its previous movements. Of course, there’s no guarantee it won’t fall further but some investors might use these lines, to choose when to buy shares.