# Technical analysis

Technical analysis is the study of historical prices, trading volume and chart-derived indicators to describe market trends and patterns, without relying primarily on company financial statements.

## What it means

Technical analysis looks at a security's trading history rather than primarily at its financial statements. A chart may show prices, volume, moving averages or other indicators. People use these observations to describe trends, momentum and possible areas of support or resistance.

An indicator is a calculation applied to market data; a chart pattern is an interpretation of its shape. Neither establishes why a price moved or what it will do next. Fundamental analysis, by contrast, examines factors such as earnings, cash flow and valuation. Technical analysis can describe a market without resolving whether a proposed trade is affordable to execute or suitable for a portfolio.

## How it is calculated

Technical analysis has no single formula. One common indicator is a simple moving average (SMA), the arithmetic mean of a fixed number of closing prices:

`SMA_n = (P_1 + P_2 + ... + P_n) / n`

- `SMA_n` is the average price over the selected `n` trading sessions, in the same currency per share as the prices.
- `P_1` through `P_n` are the closing prices for those sessions, each in currency per share.
- `n` is the number of trading sessions; it has no currency unit.

As a new session closes, the oldest price drops out and the newest enters. A moving average therefore changes with both the prices and the chosen window. Other technical indicators have different formulas and assumptions; there is no universal technical-analysis score.

## Worked example

Suppose a hypothetical US stock closes at US$48, US$50, US$52, US$50 and US$50 per share over five trading sessions.

1. Choose a five-session window: `n = 5`.
2. Add the closing prices: `48 + 50 + 52 + 50 + 50 = 250` US$ per share.
3. Divide by five: `SMA_5 = 250 / 5 = US$50 per share`.

The latest close equals this five-session average. That comparison alone gives no reliable direction for the next session. If the next hypothetical close is US$55, the oldest US$48 close drops out: the new five-session SMA is `(50 + 52 + 50 + 50 + 55) / 5 = US$51.40 per share`. The average rises even though it remains below the new closing price. Neither calculation includes the bid-ask spread, fees or the effect an order might have on the market.

## Why it matters before you trade

A chart can help identify what price and volume have done, but placing an order introduces separate questions. The quoted bid and ask may differ from the last charted price; a large order may affect its own execution price. Liquidity, order size, volatility, trading hours and pending events can also change the practical outcome.

A technical signal based on a closing price does not guarantee a fill at that price. Looking only at a favorable-looking pattern may overlook execution costs or a basket that concentrates exposure in one stock or sector. Historical patterns are observations, not evidence that the same outcome must recur.

## How PreTrAIde uses it

PreTrAIde does **not** present its analysis as chart-pattern technical analysis. Its pre-trade analysis evaluates a user-built stock basket before an order is placed, using quantitative estimates and an AI layer anchored on those estimates, news and analyst ratings. The quantitative layer includes estimated spread, participation in daily volume, market impact, daily volatility, value at risk and concentration measures.

For each line and the basket, PreTrAIde returns a GO, NO-GO or MODIFY verdict, a model-estimated success probability, a risk assessment, a suggested execution strategy and plain-language reasoning. These are decision support, not recommendations or guaranteed outcomes. PreTrAIde does not receive or execute orders; users place trades through their own broker.

## Common mistakes

- **Treating an indicator as a prediction.** A moving average summarizes past prices; it does not establish a future return.
- **Changing the window after seeing the result.** Selecting only settings that fit a past chart can overfit historical data.
- **Ignoring how prices are recorded.** Unadjusted historical prices around a stock split can produce misleading comparisons.
- **Confusing a signal with an executable price.** A charted close may differ from the price available for an actual order.

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Source: https://pretraide.com/glossary/technical-analysis