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An overview of Technical Analysis

An overview of Technical Analysis

Technical Analysis is the study of financial market action. Technical analysis use specific market-generated data for the analysis of both aggregate stock prices and individual stocks. A technical analyst studies technical indicator derived from price changes in addition to the price charts. Technical analysts believe that all the relevant market information is reflected (or discounted) […]

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Technical Analysis is the study of financial market action. Technical analysis use specific market-generated data for the analysis of both aggregate stock prices and individual stocks.

A technical analyst studies technical indicator derived from price changes in addition to the price charts. Technical analysts believe that all the relevant market information is reflected (or discounted) in the price with the exception of natural disasters or acts of God. The job of a technician is to analyze the price changes that occur over a period of time (hour-to day-to-day or week-to-week basis) or over any other constant time period displayed in graphic form, called charts.

The technical approach accepts as true that prices move in trends which are determined by the changing attitudes of investors towards various economic, monetary, political and psychological forces. It is an art to identify trend changes at an early stage and to maintain an investment posture until there is indication that the trend has reversed.

Technical analysis is also called market or internal analysis. This is because the practice utilizes the record of the market itself to assess the demand and supply of shares of a stock or the entire market. Technical analysts believe that the market itself is its own best source of data. The theory of technical analysis is that the price movement of a security captures all the information about a security.

Similar to the teachings of economics, technical analysts believe that prices are determined by the interaction of demand and supply. It is however extremely difficult to assess all the factors that influence demand and supply. Since all investors do not agreement on price, therefore the determining factor used at any point in time is “net demand” for a stock based on the sentiments of the investors (optimistic or pessimistic). Once the balance of investors becomes inclined towards one market sentiment, then it is likely to continue for the near future and can be detected by various technical indicators.

It is believed that the process by which prices adjust to new information is one of a gradual adjustment toward a new equilibrium price. While the stock adjusts from its old equilibrium level to its new level, the price tends to move in a trend. The primary concern is not the reason why the change is taking place, but rather the fact that it is taking place at all. It is deemed that stock prices show identifiable trends that can be exploited by investors. They seek to identify changes in the direction of a stock and take a position in the stock to take advantage of the trend.

Technical analysis can be briefly summarized as,

Basis of Analysis: Technical analysis is primarily based on published market data and focuses on internal factors by analyzing movements in the aggregate market, industry average, or stock where fundamental analysis focuses on economic and political factors, which are external to the market itself.

Focus of Analysis: Technical analysis focuses on identifying changes in the direction of stock prices which tend to move in trends as the stock price adjusts to a new equilibrium level. The analysis of trends is done by studying the action of price movements and trading volume across time where the emphasis is on likely price changes.

Indicators: The Technicians attempt to assess the overall situation concerning stocks by analyzing technical indicators, such as breadth of market data, market sentiment, momentum, and other indicators.

A framework for Technical Analysis

Technical analysis can be applied to both an aggregate of prices and individual stocks which involves the use of graphs (charts) and technical indicators. The primary tool of a technical analyst is price and volume, where the technical charts are the most important mechanism used for displaying this information. The forces of supply and demand result in particular patterns of price behavior, where the focus is on the trend or overall direction in price. The charts used by technician assists in identifying trends and patterns in stock prices that provide trading signals. Also volume data are used to gauge the general in the market and to help assess its trends. Note, rising/falling stock prices are usually associated with rising/falling volume. If stock prices rose but volume activity did not keep pace, technicians would be skeptical about the upward trend similarly an upward flow on contracting volume would be equally suspected. A downside movement from some pattern or holding point accompanied by heavy volume would be taken as a bearish sign.

The stock price and volume technique is also used for assessing the pattern often referred to as charting. However, technical analysis has evolved over time, so that today it is much more than the charting of individual stocks or the market. Particularly technical indicators are used to evaluate market conditions (breadth) and investors’ sentiments. It also incorporates “contrary analysis” which is an intellectual process more than a technique. The key motive behind contrary analysis is to go against the masses when all start thinking alike.

 

Author Bio : Chris is a writer who has been writing in the field of education for long .