Technical Analysis

Fundamental analysis and technical analysis are two main ways to forecast the price trend. Fundamental analysis involves researching and evaluating the characteristics of the stock or company. Technical analysis , on the other hand , pays heavier attention to price movements. In my previous post - I mentioned that fundamental analysis tells us what to buy , and technical analysis tells us when to buy.

Predicting future moves in the stock market has become a science. This form of prediction has become known as technical analysis. Traders who take this approach to investing in the stock market usually hold stocks for a short time period and then sell their stocks once the predicted profit has been achieved.

Technical analysts focus on predicting the future using observations of the past. However it is more effective to see Technical Analysis as simply a means to determine entry and exit points.

Technical analysis is the study of price data and statistical indicators that are formed by market activity. Market activity illustrates the flow of supply and demand. This supply and demand is a reflection of beliefs and opinions translated into human behavior and specifically , herd mentality. Therefore, technical analysts would argue , price patterns and indicator signals can be categorized based on historical data with a reasonably high expectation that they will occur again at some point in the future. This argument is based on the theory that human behavior is innate and , although it adapts and evolves over a long enough period of time, it remains basically the same.

Technical analysts focus on the herd mentality and how it affects the individual. It is after all very difficult to hold an opinion contrary to popular consensus especially in an arena where you have to make your opinions know , as you do in the financial markets , in the form of trades.

Chart research and technical indicators are the basic methods of technical analysis. You can know a variety of charts patterns that show price action or specific trend. Trend is a term used to describe the persistence of price movement in one direction over time. Trends move in three directions : up , down and sideways.

Technical analysis is a very short term method of investing because the potential long term growth of a company is not taken into account through this method. Trades are timed to exactly reflect the upward and downward trends in the market so nothing is left to chance. Because buying and selling go through at specific times, losses can be minimized if the market does not move in the predicted manner.

Many methods of predicting the movement of the market have been developed for use in technical analysis. These methods for the most part are based on the support and resistance concept. How this works is that, support is the level by which a downward price is predicted to increase by and resistance is the level by which an upward price is expected reach before coming down again. To put this in clearer terms prices tend to fluctuate between a support and resistance levels.

Getting a bit “dry” writing this particular post. Let’s review more about technical analysis in subsequent posts , with charts. That way might make it more pictorial and interesting.

Happy Trading !