Technical Analysis is a method of evaluating securities by analyzing statistics generated by market activity, past prices, and volume.
Technical analysts look for patterns and indicators on stock charts that will determine a stocks future performance.
Technical analysis has become popular over the years, as more and more people are convinced that historical performance of a stock is a strong indication of future performance.
The use of past performance should not be a big surprise. People using fundamental analysis have always looked at the past performance by comparing fiscal data from previous quarters and years to determine future growth.
The difference lies in the technical analystís belief that securities moves with a very predictable trends and patterns. These trends continue until something happens to change the trend, and until this change occurs, price levels are predictable.
Some technical analysts claim that they can be extremely accurate majority of the time. There are many instances of investors successfully trading securities with only the knowledge of its chart and without even understanding what companies do.
Technical analysis is a terrific tool, but most agree that it is much more effective when combined with fundamental analysis.
Every thing that affect market price is ultimately reflected in market price, whether it is underlying forces of supply and demand, fundamentals, political, psychological news etc, it all reflects in the price of the market.
If everything that affect market price is ultimately reflected in the market price, then the study of the market price is all the more necessary.
By studying price charts and a number of supporting technical indicators, the chartist can forecast which way the market is likely to go .It is doubtful that any one could trade off the fundamentals alone with no consideration of the technical analysis.
The advantage of technical analysis is that one can also analyze stock index, futures, options, currencies etc, without going into fundamentals.
Support and Resistance:
Prices move in a series of peaks and troughs, and the direction of peaks and troughs determine the trend of the market.
The troughs, or reaction lows, are called support. Support is a level or area on the chart under the selling pressure. As a result, a decline is halted and market where buying interest is sufficiently strong to overcomand by a previous reaction low.prices turn back again. Usually a support level is identified beforeh
Resistance is the opposite of support and represents a price level or area over the market where selling pressure overcomes buying pressure and a price advance is turned back. Usually a previous peak identifies a resistance level.
Market moves in a trend. The trend is simply the direction of the market. Market moves in zigzags. These zigzags resemble a series of successive waves with fairly obvious peaks and troughs. It is the direction of those peaks and a trough that continues market trend. Whether those peaks and troughs are moving up, down, or sideways tells us the trend of the market. Trend is usually broken down into three categories, i.e. major, intermediate and near term trend.
Major trend is usually for a year or so.
- Intermediate trend is usually for three weeks or more.
- The near term trend is usually defined as anything less than two or three weeks.
Each trend becomes a portion of its next larger trend. For example, the intermediate trend would be a correction in the major trend. In a long term up trend, the market pauses to correct itself for a couple of months before resuming its upward path. Secondary correction would itself consist of shorter waves that would be identified as near term dips and rallies.
The basic trend line is one of the simplest of the technical tools employed by the chartist, but is also one of the most valuable. An up trend line is a straight line drawn upward to the right along successive reaction lows. A down trend line is drawn downward to the right along successive rally peaks.