Technical Analysis of Stocks

Topics: Technical analysis, Stock market, Moving average Pages: 39 (12445 words) Published: February 24, 2013
Technical Analysis is important to form a view on the likely trend of the overall market, and it is helpful to have some idea of how to go about selecting individual stocks. Naturally, all investors would like their investments to appreciate rapidly in price, but stocks, which may satisfy this wish, tend to accompanied by a substantially greater amount of risk then many investors are normally willing to accept. However, it is important to understand that investors can be very conscious when it comes to stock ownership. Technical analysis is the use of numerical series generated by market activity, such as price and volume, to predict future price trends. The techniques applied to any market with a comprehensive price history. Primarily, but not exclusively, technical analysis is conducted by studying charts of past price movement. Many different methods and tools are used in technical analysis, but they all rely on the assumption that price patterns and trends exist in markets, and that they can be identified and exploited. Technical analysis or charting is considered to be as a supplement to Fundamental Analysis of securities. As an approach to investment analysis technical analysis is radically different from fundamental analysis. While the fundamental analysts believe that the market is 90% logical and 10% psychological, the technical analysis assumes that its 90% psychological and 10% logical. Technical analysis can be applied to any market with a comprehensive price history. The premises of technical analysis were derived from empirical observations of financial markets over hundreds of years. Perhaps the oldest branch of technical analysis is the use of candlestick techniques by Japanese traders at least as early as the 18th century, and still very popular today. DOW THEORY ITS CORNERSTONE

New tools and theories have been produced and existing tools have been enhanced at a rapid rate in recent decades, with an increasing emphasis on computer-assisted techniques. Technical analysis is not concerned with why a price is moving but rather whether it is moving in a particular direction or in a particular chart pattern. Technical analysts believe that profits can be made by "trend following." In other words if a particular stock price is steadily rising (trending upward) then a technical analyst will look for opportunities to buy this stock. Until the technical analyst is convinced this uptrend has reversed or ended, all else equal, he will continue to own this security. Additionally, technical analysts look for various price patterns to form on a price chart and will take positions in anticipation of the expected move following that pattern. The various tools of technical analysis assist the technician in determining when trends have formed, ended, etc. and when particular patterns are unfolding. One of the forecasting tools very popular among practitioners is technical analysis. Technical analysis is the examination of past price movements in order to forecast future price movements. Technical analysis is open to interpretation. Many times two technicians will look at the same chart and paint two different scenarios or see different patterns. Both would be able to come up with logical support to justify their position. In addition, even if stock prices completely followed a random walk, people would be able to convince themselves that there are e patterns having a predictive value. It has become more and more popular, as it offered an unlimited set of tools and signals and seemed to be an interesting method of market analysis. It has been proven that stock prices most of the time approximately follow a random walk pattern. Psychologists have described a number of ways in which people deal with randomness. Additionally, market participants may be subject to herd behavior. Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the...
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