Stock investing strategy: Technical investing

TECHNICAL INVESTING

Technical investing is the exact opposite of fundamental investing. The word ‘technical’ is used because, this school of stock analysis believes that all the fundamental factors that affect a company would be reflected in the share price at any point of time. The price movement is purely technical and has nothing to do with the fundamentals of the company. If this assumption hold true, then there is no need to analyse the stocks fundamentally. So, what remains to be analysed is the demand and supply levels of the stock.  For this, a technical analyst has something called ‘price charts’ in which the daily price movement of the stock along with the volume is recorded. This school believes that emotions, reactions, and psychology of individuals regarding economic events and news influence the demand and supply of stocks and in turn, it is that demand and supply forces that keep the market ticking.

Apart from charts, technical analyst employs a lot of tools like Fibonacci numbers, moving average crossover divergence (MACD), Williams %R, stochastic oscillators, momentum, directional movement, on-balance volume (OBV), relative strength index (RSI), and moving averages.

EFFICIENT MARKET THEORY.

Technical investors fundamentally believe in the efficient market theory: It believes that all information on the markets, economy and on individual stocks are known and are priced into the securities, and that securities are fairly valued at all times.

The advantage of this system is that it’s easy to understand and use. Unlike fundamental analysis which requires a detailed understanding of financial and accounting terms, technical analysis focuses on trends – graphically depicted on charts and graphs. It’s easy to understand those graphs.  It’s easy to find whether a stock is moving up, down, or sideways. Technical indicators can sometimes point to the beginning / end of a trend before it shows up in the market.

We believe that technical indicators can be used by short term investors because; in that case, what matters are the trend and the volume of activity. Both these are reflected more accurately on technical charts.

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