Technical Analysis

MEANING

Technical analysis is  a completely different approach to stock market investing-  it doesn’t try to find the intrinsic value  of a company or try to find whether a share is mis-priced or undervalued. A technical analyst is interested only in the price movements in the market. So, it all about analyzing the demand and supply or a price volume analysis.

TECHS VS FUNDAS

Technical analysis is a study of supply and demand in a market to determine what direction, or trend, will continue in the future. Investors who follow fundamentals try to spot shares that has the potential to  increase in value, while investors who follow technical analysis buy assets they believe they can sell to somebody else at a greater price.

Although technical analysis and fundamental analysis are seen by many as polar opposites – many market participants have experienced great success by combining the two. There are distinct advantages for both the schools of thought. it’s better to be versed with the pros and cons of both and take advantage of both the schools.

The purpose of mentioning technical trading tools here is to help you understand the relevance of technical terms used by experts in the stock recommendations. Technical analysis requires special charting software to accumulate data and convert it into information. Generally, online trading software offered by leading brokers has options to do technical analysis.

CHARTS -WORKING TOOLS OF A TECHNICAL ANALYST.

A technical analyst works with the help of ‘charts’. A chart is nothing but a graphical representation of the current price movement of a stock. There are various forms and styles of charts and it represents graphically almost anything and everything that takes place in the stock market.

BASIC ASSUMPTIONS

Technical analysis is based on three assumptions:

MARKETS DISCOUNTS EVERYTHING.

Technical analysis assumes that, at any given time, a stock’s price reflects everything that has or could affect the company – including fundamental factors. Technical analysts believe that the company’s fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.

PRICE MOVES IN TRENDS

In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction unless something happens to change the supply -demand balance. Such changes will take time and are usually detectable in the action of the market itself. Most technical trading strategies are based on this assumption.

HISTORY TENDS TO REPEAT ITSELF

Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.

we check more about technical analysis in the next series of articles..

Till then ..

Bye.. have a nice day !!

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