Lesson-1,Technical Analysis - Meaning and Definition
Technical Analysis means method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.
Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
Technical analysts believe that the historical performance of stocks and markets are indications of future performance.
For eg:
In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not.
By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.
Technicians says that irrational human behavior influences stock prices, and that this behavior leads to predictable outcomes.
An important premise in technical analysis is that certain price-volume factors repeat themselves, and can be illustrated graphically by chart patterns, a process known as charting.
For eg, a point and figure chart, showing the upward and downward movement of a security in a given time period;
An ascending top, showing continually rising prices signals the beginning of a price rally;
A head and shoulders pattern, depicting the reversal of a trend; and a double top, signals the end of a rally.
Technical analysts believe that, by charting the movement of a market, they can determine market swings in advance.
According to the theory, the best time to sell (take a short position) is the start of a major downtrend; the best time to buy is when prices, and trends, are heading upward. The drawback with this methodology is that chart patterns often are recognized only after the fact, that is, after events have run their course.
Conclusion
Technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. 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.
Excerpts,contents Re-edited by me and with contents courtesy-Investopedia and answers.com
I would like to thank Omprakash Vermaji for recommending me to start the course for beginners.
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