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There exist today an array of charts, patterns and statistical analyses sufficient to please even a Medieval numerologist. Though many times, it looks and reads a lot like mathematical tea-leaf reading, the vast majority of common tools derive from serious empirical studies of the markets.

The easiest way to explain what Technical Analysis is could be to contrast it with its arch-rival and sometimes partner: Fundamental Analysis.

Fundamental analysis tries to consider a financial instrument (a stock, bond, etc) by investigating factors affecting intrinsic worth. Company earnings, basic industry issues – everything from the overall economy to who sits in the Chief Financial Officer's chair.

Technical analysis avoids measurements of things such as assets and liabilities and  company or industry specifics. It looks instead for statistical patterns among historical (both recent and far past) price movements, volume of stock traded and a multitude of other variables.

A few of these variables and patterns appear arcane to most except for specialists. Fortunately there are a few basic ones accessible to the savvy but nevertheless merely human.

One of the most basic is the simple bar chart. In use for centuries in one form or another, it consists of the familiar vertical stick with small horizontal tick marks connected.

The size of the bar shows the price range of the instrument for a recent period – usually the last 24 hours or the trading day up to that point. The horizontal mark on the right indicates the beginning price, the left-pointing one shows the final price.

A series of these laid out across a chart – for periods of a week, a month, quarterly, etc – forms a pattern. It's that pattern that the technical analyst uses  (to some extent) to forecast the way the pattern will continue – i.e. what the price will likely be 1 hour or a day or 2-3 weeks hence.

Traders who rely heavily on technical analysis are rarely long term players. Somewhat like forecasting the rain, a set of data may help you guess with high probability what will occur in the immediate future. It's less useful for judging the end result three months ahead.

Candlesticks – adapted from the Japanese, where they had been utilized to foresee rice futures – undoubtedly are a common variation. The difference consists essentially of 'fattening' the vertical stick and adding color to reveal variations between beginning and ending prices.

Red strips are employed display a closing price lower than the previous period, green when the instrument closed higher. Consistently, distinctive patterns imply – to the initiated – distinct market trends.

Since options, like bonds, add the element of time expiration different variables to forecast shapes come into play. Also, since as a derivative an option has no intrinsic worth, price and volume changes can (and do) occur as an effect of   changes to the underlying asset.

Quite a few of the variables that measure these changes make their way into technical analysis charts.

Delta, for example, measures how much an option price rises or falls relative to the change in price of the underlying asset. Theta measures how much an options position gains or loses in a period of time – a day, a week, a month, etc.  Vega is a measure of how much a position gains or loses as volatility changes by a specified percentage.

Thankfully, there are software programs that are available intended to facilitate tracking of these and other variables. Algorithms are built in that experts assert indicate thresholds and patterns that accurately signal buy or sell.

Considering that there are dozens of such systems, incorporating hundreds of different variables and patterns, only experience can teach you which ones are meaningful and which ones are only numerology.

Tags: candlesticks, charts, Technical analysis, technical analysis charts