Technical Analysis part-1

Tuesday, February 23, 2010

What is "Technical Analysis" ?
Technical Analysis is predicting  future stock price movements based on an analysis of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. It can  help investors anticipate what is "likely" to happen to prices over time.

The basic assumption in Technical Analysis is that the current price fully reflects all available information. It is similar to the strong and semi-strong forms of market efficiency, where all the market participant have knowledge of all the information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. A technical analyst (TA) is concerned about two things

1. what is the current price?
2. what is the history of price movement?

The price is the result of  forces of supply and demand for the company's stock. The objective of analysis is to forecast the direction of the future price. Technical analysis represents a direct approach by focusing on price and only price,

Fundamentalists are concerned with why the price is what it is and doing all sorts of valuations. For TA, the why portion of the equation is too broad and many times the fundamental reasons given are highly suspect. Technical analysts believe it is best to concentrate on what and never mind why. Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After all, the value of any asset is only what someone is willing to pay for it.Who needs to know why?  Volume also play a very important role in technical analysis to assess demand and supply.

There is a positive skew towards technical analysis than fundamental analysis for its use in short term trading means for short term trading it is more preferred.

For a small and retail investor its never been easy to do the fundamental valuations as he/she doesn't have that much of time and resources to do so. A little understanding of technical analysis indeed helps a investor to  enter or exit market on the nick of time. In the next post, I am going to write about charting types and later on the inferences drawn from different charting patterns.


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