Intro To Stock Market Technical Analysis
Stock market technical analysis involves a study of the movement of stock prices and volumes to understand trends and make predictions about future movement of the stock. While the concept of fundamental analysis evaluates the effects of economic, market, and company related factors on share prices, technical analysis takes only the stock price and volume history into consideration, with the assumption that these two factors reflect all the information about the company’s prospects.
For buyers and sellers, relying on sound technical analysis brings better returns. This kind of analysis helps investors reap the benefits of spikes in the market and stay clear when a slump is expected. In other words, it allows them to carry out investments with lower risk and higher profits.
Goal of technical analysis
A stock market technical analyst aims at making accurate price movement predictions to enable investors to take decisions that will give good returns. The basic goal is to follow a risk reduction and investment management program, which focuses on deriving large gains from specific investments. These large gains are, in theory at least, expected to be substantial enough to outweigh any small losses.
Tools used in technical analysis
Different technical analysts use different methodologies to arrive at their conclusions. However, the basic concepts remain the same. The analyst tries to find trends in the stock trading data, and by identifying these trends, he tries to predict with fair accuracy where the prices are headed.
Although many factors have to be considered in stock market technical analysis, there are three main tools that help in making any predictions.
- Price Trends – A trend is the price movement pattern over the past years of the security being analyzed. While straight forward uptrends and downtrends are easy to detect and comprehend, the security may also be on either trend without it being as evident. This happens when there are alternating highs and lows throughout the recent past of the security. A sideways or horizontal trend is seen when there is little up or down movement in the security’s prices. The time span of the trend is also an important factor in the technical analysis of the security.
- Volume – Volume denotes the number of securities traded in a particular period. Any price movement can be confirmed as a trend only if it is accompanied by good volumes. Spikes in prices with low volumes being traded are likely to be unsustainable spurts and cannot be classified as an uptrend.
- Charts – They are graphical representations of the price and volume movements of a security and allow analysts to see the pattern or trend which the security is following. But the trend followed may be characterized by many fluctuations. By using moving average of prices of the security over a period, analysts overcome this problem. Charting with moving averages allows the true trend to emerge. This in turn enables better predictions.
Although analysts largely base their predictions on past facts, there is still a degree of subjectivity involved in understanding stock trends. That is why both expertise and experience are very important for accurate stock market technical analysis.
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