Technical Analysis is a method for forecasting future price movements based on the analysis of historical price movements and trading volume. Just like most other forecasting tools, technical analysis does not generate absolute and perfectly accurate estimates regarding future price activity. However, technical analysis may help traders and investors anticipate what is “most likely” to occur in the future. Technical analysis utilizes a wide array of visual charting tools and indicators to analyze stock market forces and predict future price movement.
Technical analysis can be applied to individual stocks and stocks as well as equity and bond indices. Technical analysis can also be applied to mutual funds, exchange traded funds (ETFs), commodities, futures or any tradable security which price is determined by demand and supply. Price data can refer to the open, high, low, or close price for any given security during a particular time frame. The time frame can be of the high frequency type or intraday (tick data, 1-minute, 5-minute, 10-minute, 30-minute or hourly intervals) or of the low frequency type i.e. daily, weekly monthly, quarterly as well as yearly. Technical analysis is not limited to price data. Many technical analysts employ tools and indicators that are based on trading volume or even open interest data.
Technical analysis is based on the principles that stock prices discount every relevant information, that prices are not random and move in trends, and that history tends to repeat itself.
The first principle agrees with the claims of the strong and semi-strong types of market efficiency. Technical analysts believe that today’s stock prices reflect all available and relevant information. Due to the fact that all information has already been reflected in stock prices, the stock price is a good estimate of the fair value. The fact that stock prices “make sense” makes technical analysis meaningful. Technical analysis takes advantage of the information reflected in prices to understand where the market stands and where the market is going.
The second principle of technical analysis is that prices move in a systematic manner i.e., trends. A trend can have either an upside or a downside direction. However, there may be times when prices do not trend and fluctuate in a random manner (sideways movement). But if price movements were always random, it would be almost impossible to make money using, not only technical analysis, but other more sophisticated tools and methodologies also. Technical analysis practitioners believe that it is possible to identify a trend in an early stage and make money as the trend progresses.
The third principle is that what happened in the past is likely to happen in the future. Technical analysis practitioners believe that traders and investors as a group repeat the same mistakes and overreacting behavior over and over again. While investor sentiments are not always rational, nonetheless, they are present and affect stock prices. Simply because investor behavior repeats itself frequently, technical analysts believe that identifiable, as well as predictable price patterns will emerge on the chart.
Technical analysis is easy and straightforward to follow. There is a rich toolkit that a technical analysis practitioner can employ without much effort. However, technical analysis has its weaknesses. Personal biases and opinions may affect the overall process with unpleasant results. Technical analysis is an “art”, not a science. Even though a scientific approach is possible, there will be always cases where interpretation of the situation may be difficult.
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Technical analysis can be applied to individual stocks and stocks as well as equity and bond indices. Technical analysis can also be applied to mutual funds, exchange traded funds (ETFs), commodities, futures or any tradable security which price is determined by demand and supply. Price data can refer to the open, high, low, or close price for any given security during a particular time frame. The time frame can be of the high frequency type or intraday (tick data, 1-minute, 5-minute, 10-minute, 30-minute or hourly intervals) or of the low frequency type i.e. daily, weekly monthly, quarterly as well as yearly. Technical analysis is not limited to price data. Many technical analysts employ tools and indicators that are based on trading volume or even open interest data.
Technical analysis is based on the principles that stock prices discount every relevant information, that prices are not random and move in trends, and that history tends to repeat itself.
The first principle agrees with the claims of the strong and semi-strong types of market efficiency. Technical analysts believe that today’s stock prices reflect all available and relevant information. Due to the fact that all information has already been reflected in stock prices, the stock price is a good estimate of the fair value. The fact that stock prices “make sense” makes technical analysis meaningful. Technical analysis takes advantage of the information reflected in prices to understand where the market stands and where the market is going.
The second principle of technical analysis is that prices move in a systematic manner i.e., trends. A trend can have either an upside or a downside direction. However, there may be times when prices do not trend and fluctuate in a random manner (sideways movement). But if price movements were always random, it would be almost impossible to make money using, not only technical analysis, but other more sophisticated tools and methodologies also. Technical analysis practitioners believe that it is possible to identify a trend in an early stage and make money as the trend progresses.
The third principle is that what happened in the past is likely to happen in the future. Technical analysis practitioners believe that traders and investors as a group repeat the same mistakes and overreacting behavior over and over again. While investor sentiments are not always rational, nonetheless, they are present and affect stock prices. Simply because investor behavior repeats itself frequently, technical analysts believe that identifiable, as well as predictable price patterns will emerge on the chart.
Technical analysis is easy and straightforward to follow. There is a rich toolkit that a technical analysis practitioner can employ without much effort. However, technical analysis has its weaknesses. Personal biases and opinions may affect the overall process with unpleasant results. Technical analysis is an “art”, not a science. Even though a scientific approach is possible, there will be always cases where interpretation of the situation may be difficult.
StockTradingCollege.com, Stock Trading and Investing for Beginners