Technical Analysis Of Stocks Pdf

[Mauricette Atencio]

Technical analysis uses historical market behavior to anticipate future movements. While it can often be effective, past performance is no guarantee of future results, and traders should be careful not to over-rely on any one analytical tool.

While there is no "best" technical analysis tool, the most popular indicators are moving averages. These lines represent the average price of an asset over several trading sessions, without the noise of daily price movements. By comparing longer-term moving averages with shorter-term ones, traders can anticipate changes in market sentiment.

Technical analysis is premised on the belief that most traders will behave in predictable ways, due to herd dynamics and group psychology. For example, many traders will tend to exit a position after a sharp drop in market price, or to take profits when the asset gains a certain level. Since all traders have access to the same market information, and many of them are using the same technical analysis tools, there is also an element of self-fulfillment in technical predictions.

Technical analysis examines volume and price movements to predict the behavior of other traders in the market. Because these trades cause price movements, technical analysts hope to predict future price movements based on current market behavior.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

The CMT Association supports the largest collection of chartered or certified analysts using technical analysis professionally around the world. The association's Chartered Market Technician (CMT) designation can be obtained after three levels of exams that cover both a broad and deep look at technical analysis tools.

Professional technical analysts typically assume three things. First, the market discounts everything. Second, prices, even in random market movements, will exhibit trends regardless of the time frame being observed. Third, history tends to repeat itself. The repetitive nature of price movements is often attributed to market psychology, which tends to be very predictable.

Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock. The core assumption of technical analysis, on the other hand, is that all known fundamentals are factored into price; thus, there is no need to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic value, but instead, use stock charts to identify patterns and trends that might suggest how the security's price will move in the future.

Your first step is to learn about investing, stocks, markets, and financials. This can be done through books, online courses and materials, and in-person classes. Once you understand the basics, you can start studying technical analysis.

Fundamental and technical analysis are two common ways to sort and pick stocks. How and when to use them can be a matter of personal style, but each has its strengths.

Fundamental analysis attempts to identify stocks offering strong growth potential at a good price by examining the underlying company's business, as well as conditions within its industry or in the broader economy. Investors have traditionally used fundamental analysis for longer-term trades, relying on metrics like earnings per share (EPS), price-to-earnings (P/E) ratio, P/E growth, and dividend yield.

Technical analysis, on the other hand, bypasses the underlying company's fundamentals and instead looks for statistical patterns on stock charts that might foretell future price moves. The idea here is that stock prices already reflect all the publicly available information about a particular company, so there's nothing to be gained from poring over a balance sheet, income statement, or other financial information. Given the focus on price and volume moves, traders have traditionally used technical analysis for shorter-term trades or to help identify entry prices on stocks where fundamental analysis has already been performed.

But does it have to be an either/or proposition?

Both fundamental and technical analysis can reveal potentially valuable information, and focusing on just one style could cause you to miss important clues about a stock's prospects. And because the intended duration of an investment or trade may change, using both forms of analysis is an approach you might consider.

Why not deploy them so their strengths complement each other? For example, a trader might use fundamental factors to select the candidate and technical factors to identify a specific entry or exit price.

Value investors focus on whether the current stock price makes sense given the health of a particular company and typically seek companies that appear to be priced below what their revenues, EPS, or other fundamental metrics suggest. Such investors often focus on industry-leading companies, which are generally past their peak revenue growth years, because these companies often pay steady dividends. Value stocks tend to have low P/E ratios and pay above-average dividends, but they might trade at a price that is very low or below their book value (total tangible assets minus total liabilities). Sometimes value investing is described as investing in great companies at a good price, not simply buying cheap stocks.

When screening for fundamental factors, consider focusing on stocks rated A or B by Schwab Equity Ratings because these are considered "buy" candidates relative to the other rated securities (C-F). In the example below, this step alone narrows the list of possible stocks from 2,800 candidates to 814 candidates.

Because Schwab Equity Ratings already takes many fundamental factors into account, investors searching for growth stocks could seek out stocks that have delivered strong revenue growth in the past and that appear set to deliver both strong revenue and profit growth in the future. In the example below, which screens for revenue growth over the last three years, current year earnings growth, and current year EPS growth, selecting these three additional criteria narrows the list of 814 candidates to just five.

As you search, be wary of extremely high dividend-yielding stocks because they might be too good to be true. On a similar note, keep in mind that cheap doesn't necessarily mean good. A low stock price could be the result of a company's outdated products, bad management, expired patents, pending lawsuits, etc.

Once you have a more manageable list of five or six, it's time to apply some technical screeners.

Stock selection using technical analysis generally involves three steps: stock screening, chart scanning, and setting up the trade. With stock screening, your goal might be to arrive at a list of 20 or 25 candidates using a set of technical criteria. You could then try to narrow that list down to three or four candidates by scanning the charts for possible entries or points where it could make sense to buy. Finally, you'll perform a more detailed chart analysis and choose the one you may consider trading.

We'll assume for the sake of discussion that you prefer pullback entries and have narrowed your choices down to two buy candidates, stock A and stock B. To choose between them, it could make sense to bring a few indicators to bear: price patterns, volume, moving averages, and an indicator called the stochastic oscillator.

Because we're looking for pullbacks, our first task is to confirm a price change is likely to be a temporary move and not a full-on reversal. Chances of a trend reversal may be lower if the stock has pulled back to a support level, such as a moving average or an old low. However, this isn't a guarantee. We also want to know if a pullback is ending. For example, if a stock can push past the previous day's high, it could mean the uptrend is resuming.

On to our charts. We can see that both stocks A and B have pulled back and held their 20-day moving averages (yellow lines). So far, so good.

Stock selection doesn't have to be difficult, but you do need to be flexible. Look for markets that are moving but also be willing to hold off on a trade if the indicators aren't conveying a compelling setup. Consider going short as well as long. Finally, and perhaps most importantly, you need to be disciplined. Don't let the inevitable bad trades turn into a disaster. Keep your losses small and live to trade another day.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.