Chart analysis (also called technical analysis) is the study of market action, using price charts, to forecast future price direction. The cornerstone of the technical philosophy is the belief that all of the factors that influence market price—fundamental information, political events, natural disasters, and psychological factors— are quickly discounted in market activity. In other words, the impact of these external factors will quickly show up in some form of price movement, either up or down. Chart analysis, therefore, is simply a short-cut form of fundamental analysis. Consider the following:A rising price reflects bullish fundamentals, where demand exceeds supply; falling prices would mean that supply exceeds demand, identifying a bearish fundamental situation. These shifts in the fundamental equation cause price changes, which are readily apparent on a price chart. The chartist is quickly able to profit from these price changes without necessarily knowing the specific reasons causing them. The chartist simply reasons that rising prices are indicative of a bullish fundamental situation and that falling prices reflect bearish fundamentals.
Another advantage of chart analysis is that the market price itself is usually a leading indicator of the known fundamentals. Chart action, therefore, can alert a fundamental analyst to the fact that something important is happening beneath the surface and encourage closer market analysis.
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