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 methods.like rely on chart patterns, use technical indicators and oscillators,
and also use combination of the two. technical analysis 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.
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.
4. Art over science
5. No need to know
6. Self-fulfilling prophecy
7. Momentum reverses
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.
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.
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 stimuli 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. A study of history shows that set patterns repeat themselves over long periods. By relying on the past to predict the future, we can take advantage of these patterns.
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 stimuli 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. A study of history shows that set patterns repeat themselves over long periods. By relying on the past to predict the future, we can take advantage of these patterns.
4. Art over science – Many investment approaches require us to
perform a great deal of math to generate an answer. Technical analysis does
not. Looking at the same chart, many investors will derive different answers.
Therefore, reading charts evolves into an art form where each analyst can
provide a unique insight.
5. No need to know – As more information becomes available,
people become obsessed with knowing why events occur. In the markets, we often
never know. Instead of searching for the next piece of data that magically
unlocks the puzzles, technicians focus on the past and interpolate how it will
affect the future.
6. Self-fulfilling prophecy – Enough people seeing the same pattern will take actions that force the
prediction to occur. While this is positive if you are on the right side of the
trade, it presents a major weakness when everyone attempts to exit at the same
time.
7. Momentum reverses – When a trade becomes very crowded with
everyone assuming the same position, unexpected surprises can drive prices. If
the exit becomes crowded, what first looked promising quickly becomes a
nightmare.
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