Technical
Analysis in Stock Market Trading
The methods used to analyze securities (stocks) and make
investment decisions are vast, but tend to fall into one of two categories
known as fundamental analysis and technical analysis. Fundamental analysis
involves researching and evaluating the characteristics of the company
including the evaluation of company financial statements in order to
approximate the value of a company. Technical analysis, on the other hand, pays
no attention to the value of a stock and cares more about price movements based
on general market psychology and historical trends.
There are numerous charting indicators available and over
time I will attempt to discuss and educate our readers on these types of
indicators and how to read them for important data. However, for the scope of
today's article, I simply wanted to introduce our readers to the basics of
technical analysis and how it can be helpful when completing due diligence on
investment or trading opportunities. If you understand the benefits and
limitations of technical analysis, it can give you a new set of tools or skills
that will enable you to be a better trader or investor.
Technical analysis can be defined as a method of evaluating
future security prices and market directions based on statistical analysis of
variables such as trading volume, price changes, trends, patterns, and
formations in charts. These formations within the charts are, as believed by
technical analysts, said to be in large part dictated by the psychological
makeup of the market.
Through the use of charting, analysts attempt to explain the
supply and demand of a security and help in determining the emotions of those
in the market. Technical analysis is based on the basic theory that the price
of a stock reflects everything that could or has affected a stock. Therefore,
fundamental factors as well as economic factors like the overall psychology of
the market are all priced into the stock, which leaves only the analysis of
supply and demand in predicting the price movement of the forecasted stock.
Analysts believe that future prices are dictated by
previously established trends, attributing the repetitive nature of these
trends to the basic makeup of the markets psychology. They believe that market
participants tend to react in common ways to events within the market,
therefore through the use of technical charting, patterns can be used to
analyze price movements and understand these trends.
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