What is Technical Analysis?
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Andy Black
Dec 4, 2009, 12:29:17 AM12/4/09
to MoneySense Education
In investing, fundamental analysis is the analysis of the fundamentals
of a company, i.e. whether its business is thriving or going down the
pan. Technical analysis doesn't concern itself with company
fundamentals, it attempts to predict the future price of a stock based
on previous prices and charts. Stock charts are a reflection of price
movements over time and the volumes of stocks traded.
According to technical analysis any news about a company can be seen
in the charts first and if you are adept at reading the signs then you
will see which way a stock price is headed before any news is
announced by the company. Technical analysis is based on the following
assumptions - prices are determined by supply and demand, supply and
demand is a result of both rational and irrational behaviors, prices
move in trends and these trends are generally long-lasting, changes in
supply and demand can be spotted by analyzing the way the stock price
behaves.
Why bother with technical analysis?
It is easier than fundamental analysis and faster. It does not make us
of company accounts and therefore cannot be manipulated by companies,
it tells you what to buy and sell and when. Technical analysis based
on the behavior of crowds, if people expect a certain thing to happen
upon a certain signal, then they will react in a particular way when
they see that signal. If enough people react in the same way then the
expected outcome is achieved and the analysis becomes self-fulfilling
i.e. a stock price goes up because enough people buy the stock because
they expected it to go up. Many hundreds of expert analysts use
technical analysis and thus influence stock prices by reacting to the
same signals.
There are many indicators that are used in technical analysis, but one
of the principal indicators is the 200 day moving average. If a stock
falls below its 200 day moving average this is considered a bad signal
and people tend to sell the stock. If a stock goes above its 200 day
moving average this is generally considered a good sign and people
tend to buy.
If 80% of stocks in the stock market are above their 200-day moving
averages, this is considered to be overbought and so people tend to
sell the market. If less than 20% of stocks are above their 200-day
moving averages, this is considered to be oversold and a signal to
buy.
There are many other indicators used in technical analysis such as the
relative strength index, Bollinger bands etc... and any online stock
trading site will allow you to include them automatically on any
charts you may wish to look at, you don't need to work them out
yourself. A study of all the different indicators is probably not
necessary but if you are serious about investing or trading the stock
market you will certainly need to learn about the main indicators.
Turn $1000 Into $1 Million Guaranteed From Stock Trading: http://www.stockivstd.tk/
of a company, i.e. whether its business is thriving or going down the
pan. Technical analysis doesn't concern itself with company
fundamentals, it attempts to predict the future price of a stock based
on previous prices and charts. Stock charts are a reflection of price
movements over time and the volumes of stocks traded.
According to technical analysis any news about a company can be seen
in the charts first and if you are adept at reading the signs then you
will see which way a stock price is headed before any news is
announced by the company. Technical analysis is based on the following
assumptions - prices are determined by supply and demand, supply and
demand is a result of both rational and irrational behaviors, prices
move in trends and these trends are generally long-lasting, changes in
supply and demand can be spotted by analyzing the way the stock price
behaves.
Why bother with technical analysis?
It is easier than fundamental analysis and faster. It does not make us
of company accounts and therefore cannot be manipulated by companies,
it tells you what to buy and sell and when. Technical analysis based
on the behavior of crowds, if people expect a certain thing to happen
upon a certain signal, then they will react in a particular way when
they see that signal. If enough people react in the same way then the
expected outcome is achieved and the analysis becomes self-fulfilling
i.e. a stock price goes up because enough people buy the stock because
they expected it to go up. Many hundreds of expert analysts use
technical analysis and thus influence stock prices by reacting to the
same signals.
There are many indicators that are used in technical analysis, but one
of the principal indicators is the 200 day moving average. If a stock
falls below its 200 day moving average this is considered a bad signal
and people tend to sell the stock. If a stock goes above its 200 day
moving average this is generally considered a good sign and people
tend to buy.
If 80% of stocks in the stock market are above their 200-day moving
averages, this is considered to be overbought and so people tend to
sell the market. If less than 20% of stocks are above their 200-day
moving averages, this is considered to be oversold and a signal to
buy.
There are many other indicators used in technical analysis such as the
relative strength index, Bollinger bands etc... and any online stock
trading site will allow you to include them automatically on any
charts you may wish to look at, you don't need to work them out
yourself. A study of all the different indicators is probably not
necessary but if you are serious about investing or trading the stock
market you will certainly need to learn about the main indicators.
Turn $1000 Into $1 Million Guaranteed From Stock Trading: http://www.stockivstd.tk/
Viktor Ka
Apr 28, 2014, 4:12:09 PM4/28/14
to moneysens...@googlegroups.com
Technical analysis is useful, however, when you trade stocks you do not have to forget about fundamentals. If a stock is on its way to bankruptcy, technical analysis will not help you much. It will not help you in case of the stocks that just started to trade - were recently introduced - it is simply because there is not enough history to make any conclusion based on technical analysis. So, you should be very careful and understand when fundamental or technical approach should be chose. Such in another example, many fundamental data are useless for a day trader who plans to make several trades a day. So, you have to understand what and where to use.
When it comes to technical analysis, you have also understand that it is not just about the price, it is also about volume and volatility. You cannot just focus on the price trend analysis and forget about volume and volatility. In order to understand why price trend moved in specific direction you need to see volume traded during this move and analyze the volatility of this move. Only the result of full analysis (volume, price and volatility) may predict possible trend changes with certain high degree of confidence.
Personally, I use http://www.marketvolume.com/ charts which allow analyzing volume, volatility and price at the same time and not only for stocks but for U.S. indexes as well.
When it comes to technical analysis, you have also understand that it is not just about the price, it is also about volume and volatility. You cannot just focus on the price trend analysis and forget about volume and volatility. In order to understand why price trend moved in specific direction you need to see volume traded during this move and analyze the volatility of this move. Only the result of full analysis (volume, price and volatility) may predict possible trend changes with certain high degree of confidence.
Personally, I use http://www.marketvolume.com/ charts which allow analyzing volume, volatility and price at the same time and not only for stocks but for U.S. indexes as well.
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