Where do you see this?

In stock investing articles and websites.

What does it mean?

Technical analysis is an approach that uses price charts to predict future trends in the markets. By careful interpretation, such charts become tools when deciding on certain investments. The underlying assumption of this approach is that history repeats itself, and past price trends can predict future ones.

Why is it important?

Various types of charts and the patterns within them are used to indicate the general trends of the market. A commonly used basic pattern is the 'head and shoulders formation'. It is typically formed when share prices rise forming the 'left shoulder', before more buyers enter the market to push the prices to a new peak forming the 'head'. The market then undergoes a correction before the second wave of buyers push the prices to another lower peak, forming the 'right shoulder'.

It is important to spot the right market direction because it will impact your investment decision. In the case of the 'head and shoulders formation', the technical analyst will draw a line across the two previous lows to form a 'neckline'. Once the share price cuts below this neckline, it is a signal that you should sell your shares and take profits.

So you want to use the term. Just say...

I'm using technical analysis to help me determine when I should enter and exit the market.

Lorna Tan

This article was first published in The Straits Times.