Thursday, March 28, 2013

Technical Analysis

Technical analysts believe Price discounts everything, all relevant information is already reflected by prices.

Technical analysts believe historical Price behavior repeats itself so that recognizable (and predictable) price patterns will develop on a chart, and Charts show how prices are moving (or not moving), when prices are trending, and the strength of those trends. And this information can be obtained at a glance.

Charting is quick and inexpensive. Technical analysis is less time consuming and less costly than fundamental analysis. It can be performed in less than five minutes.

With Technical Analysis at a glance, the trader can view an incredible amount of information on the price movement of any given Stock, commodity or currency. Technical analysis also gives buy/sell signal by helping traders in Finding Entry and Exit Points in Profitable trade.

Technical analysis focuses on price movement. Technical analysts believe that prices trend directionally i.e., up, down, or sideways (flat). The primary focus of technical analysis is on the movement of prices.  Taking a look at a chart quickly displays a price that is trending or stuck in a range. Trends are critical to technicians because Scrip is likely to continue moving in the direction of the trend. Charts show them clearly and quickly.

Patterns are easily identified; one of the basic tenets of market action is that it repeats itself in clear, unmistakable patterns. Using charts helps the trader to find patterns and predict price movements based on these patterns.  There are many proven patterns that prices will follow. Hence, patterns have strong predictive powers.

Technical analysis, which leads to an estimate of future price trends and decision. Whereas fundamental analysts use economic data that are usually separate from the stock or bond market, the technical analyst believes that using data from the market itself is a good idea because “the market is its own best predictor.” Therefore, technical analysis is an alternative method of making the investment decision and answering the questions:
What securities should an investor buy or sell? When should these investments be made?

Technical analysts base trading decisions on examinations of prior price and volume data to determine past market trends from which they predict future behavior for the market as a whole and for individual securities. Several assumptions lead to this view of price movements:
1. The market value of any good or service is determined solely by the interaction of supply and demand.
2. Supply and demand is governed by numerous rational and irrational factors. Included in these factors are those economic variables relied on by the fundamental analyst as well
as opinions, moods, and guesses. The market weighs all these factors continually and
3. Disregarding minor fluctuations, the prices for individual securities and the overall value of the market tend to move in trends, which persist for appreciable lengths of time.
4. Prevailing trends change in reaction to shifts in supply and demand relationships. These shifts, no matter why they occur, can be detected sooner or later in the action of the market itself.

The first two assumptions are almost universally accepted by technicians and non technicians alike. Almost anyone who has had a basic course in economics would agree that, at any point in time, the price of a security (or any good or service) is determined by the interaction of supply and demand.

The only difference in opinion might concern the influence of the irrational factors.Certainly, everyone would agree that the market continually weighs all these factors.

A stronger difference of opinion arises over the assumption about the speed of adjustment of stock prices to changes in supply and demand. Technical analysts expect stock prices to move in trends that persist for long periods because they believe that new information does not come to the market at one point in time but, rather, enters the market over a period of time. This pattern of information access occurs because of different sources of information or because certain investors receive the information or perceive fundamental changes earlier than others.

As various groups ranging from insiders to well-informed professionals to the average investor receive the information and buy or sell a security accordingly, its price moves gradually toward the new Equilibrium. Therefore, technicians do not expect the price adjustment to be as abrupt as fundamental analysts and efficient market supporters do, but expect a gradual price adjustment to reflect the gradual flow of information shows this process wherein new information causes a decrease in the equilibrium price for a security, but the price adjustment is not rapid. It occurs as a trend that persists until the stock reaches its new equilibrium.

Technical analysts look for the beginning of a movement from one equilibrium value to a new equilibrium value. Technical analysts do not attempt to predict the new equilibrium value. They look for the start of a change so that they can get on the bandwagon early and benefit from the move to the new equilibrium by buying if the trend is up or selling if the trend is down. Obviously, if there is a rapid adjustment of prices, as expected by those who espouse an efficient market, it would keep the ride on the bandwagon so short that investors could not get on board and benefit from the ride.

Fundamental analysis looks at a share’s market price in light of the company’s underlying business proposition and financial situation. It involves making both quantitative and qualitative judgments about a company. Fundamental analysis can be contrasted with ‘technical analysis’, which seeks to make judgments about the performance of a share based solely on its historic price behavior and without reference to the underlying business, the sector it’s in, or the economy as a whole. This is done by tracking and charting the companies stock price, volume of shares traded day to day, both on the company itself and also on its competitors. In this way investors hope to build up a picture of future price movements.

What Is Technical Analysis?
Technical analysis is a method of evaluating securities by analyzing the 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.

Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns, others use technical indicators and oscillators, and most use some combination of the two. In any case, technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't care whether a stock is undervalued - the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the future.

The field of technical analysis is based on three assumptions:
1.The market discounts everything.
2.Price moves in trends.
3.History tends to repeat itself.

1. The Market Discounts Everything
A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.

2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market views over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.

Not Just for Stocks
Technical analysis can be used on any security with historical trading data. This includes stocks, futures and commodities, fixed-income securities, forex, etc. In fact, technical analysis is more frequently associated with commodities and forex, where the participants are predominantly traders.

Technical Analysis: Fundamental Vs. Technical Analysis
Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. Technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals.

The criticisms against technical analysis and how technical and fundamental analysis can be used together to analyze securities.

The Differences: Charts vs. Financial Statements
At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements.

By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment, this simple tenet holds true.

Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts. 

Time Horizon
Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years.

The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. It can take a long time for a company's value to be reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value. This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years, in some cases.

Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. Also remember that fundamentals are the actual characteristics of a business. New management can't implement sweeping changes overnight and it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts.

Trading Versus Investing
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.

Although technical analysis and fundamental analysis are seen by many as complete opposites - like the oil and water of investing - many market participants have experienced great success by combining the two. For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. Often at times, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved.

Alternatively, some technical traders might look at fundamentals to add strength to a technical signal. For example, if a sell signal is given through technical patterns and indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. Having both the fundamentals and technicals on your side can provide the best-case scenario for a trade.
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