If you are planning to invest in the stock market, know that
it is essential to have some background of how this market moves. You can't
just trust your broker to do everything. In fact, you have to know exactly what
you're doing, if you're going to gain anything from your investment. If you're
starting small, the more you should begin educating yourself, and one of the
most important lessons you have to learn is technical analysis of stocks.
What is Technical
Analysis of Stocks?
Technical analysis generally involves looking into the
movements of prices in the market and anticipating how they are likely to
affect prices within a specific timeframe. It is, to some extent, a prediction
of how the market is likely to behave within a certain timeframe. However,
technical analysis is not absolute, meaning; any market prediction can fail.
Technical analysis is typically used to manage accounts in stock, commodities,
futures, forex or any other traded instrument where price is largely dependent
on supply and demand. Some analysts though would also consider volume or open
interest figures as important factors. Price in this context is defined as any
combination of open, high, low or close occurring for a certain security over a
period of time, which can be anywhere from one minute to one year or even many
years.
What Goes Into Stock
Technical Analysis?
It is said that there is no single element that is at the
center of stock market technical analysis. In fact, there could be a
combination of three elements, first of which is price. According to experts,
price is pretty much all that is needed to see a market clearly. It is the one
true representative of how market participants, from traders to fundamental
analysts, think price should be at a particular point. Thus, it forms the sole
basis for predicting future market actions. Second, price can be more scientific
than people think. This has something to do with trends being reliable
indicators of where a market is headed, although they remain unbolted as well.
Third, the way price is moving is always more important than why it is moving
that way. Everybody knows that price is the result of supply and demand, so it
is futile to over-rationalize.
Stock Technical
Analysis and the Bottom-line
A technical analyst may use various principles in analyzing
charts, indicators and other concrete facts that point to a particular market
direction. However, it can all be simplified by going down to the basic
requirements for analysis - the price, where it came from and where it's
headed. Even so, technical analysis in stocks can be more accurately described
as an art rather than a science because it is not exact and therefore, not
foolproof. A prediction may be based on actual price movements, but it will
ultimately hinge on the analyst's perception of such behavior. In other words,
even the evaluation of the best technical analysts in the world are not
infallible because there is no real gauge as to whether or not a prediction is
correct until such time that it proves to be correct or not.
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