Technical analysis
By Yinon Arieli
Did you ever heard of Fibonacci, moving averages or candlestick charting? Well,
these are few of technical analysis basic tools. Technical investors believe
that all the information about a given stock can be viewed by reviewing its past
and present statistics, such as the trend in the volume of stocks traded and the
stock price chart (the graph of the stock price change over time). Then, by
mathematically analyzing the behavior of the graph and using statistical
analysis they (hypothetically) can identify patterns suggesting the future
behavior of the price.
Usually, technical analysis is used for the short term,
since it is too hard to predict patterns way into the future (although there are
some who try).
There are three basic assumptions behind technical analysis. The first states
that stock price reflects everything you need to know; therefore, technical
analysts assume that fundamental factors and the market psychology are already
priced into the price. Second, technical analysis assumes that price of a stock
moves in trends. This means that after a trend has been established, the future
trend is more likely to continue in the same direction than going against it.
Finally, technical analysis is strongly based on the underlying assumption that
historical patterns tend to repeat themselves. In simple words, it means that
investors tend to react more or less the same way to similar market events over
time.
Although it may seem straightforward, there is almost infinite number of
mathematical techniques and tools for technical analysis. Most of the
technicians are first trying to figure out the overall trend of the price change
in order to conclude if it is an uptrend or downtrend. Mathematical pattern
descriptions such as moving averages, oscillators and other indicators are the
tools which assist the technical investor to apply this analysis.
Then, the
investors start to understand the smaller details inside the trend and see if
there is any support or resistance to this trend. For example an uptrend with a
support in trading volume could be a good indicator for the stock price to
continue climbing up. This might be a good time to buy the stock. On the other
hand, if there is a strong resistance to the uptrend, it might be a good time to
sell if you hold the stock.
Technical analysis is not simple and definitely not absolute. In addition
technical investors want to know even more details. They also want to know for
example the specific shape of the graph pattern; it could be classified as
having a head shape, a shoulder, a cup or even a handle.
Feel confused? It is OK. Technical analysis is complicated at first sight. The
large variety of techniques requires you to educate yourself regarding its basic
rules. Then, if you choose to use it, you will have to improve your skills by
practicing the different techniques. Yalicoo is a great place for this purpose
(and we will get to that shortly).
There is a vast debate both in the academic and in the private world about the
capability of these technical techniques to beat the market. Studies tend to
show that technical analysis does not work for the long run, but it is much
harder to test it on the short run, since many of technical analysis conclusions
are not that conclusive.
Next: What method to choose
Table of contents
overview
Fundamental
Analysis
Technical Analysis
What method to choose
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