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
automatically.
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.
