Introduction to Technical Analysis

How is analysis done?

Stock market investors make their decisions based on two different kinds of analysis – the first is known as fundamental analysis and the second as technical analysis.

Technical analysis is a study of share price patterns in the past, while fundamental analysis looks at the company's financial condition, management and competitive position in its industry or sector. For finding investing decision, fundamental analysts look at a company’s annual report while a technical analyst looks at the chart of the stock’s price movements in the history. 

Differences between technical and fundamental

While fundamental analysts examine earnings, dividends, new products, research and the like, technical

analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions; these two concepts are called psych (psychology) and supply/demand.

Technicians employ many techniques, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns. Technical analysis is frequently contrasted with fundamental analysis, the study of economic factors that influence the way investors price financial markets. Technical analysis holds that prices already reflect all such trends before investors are aware of them.

In terms of applications, technical analysis is used for trading while fundamental is used for investing. Since technical analysis requires the use of charts and graphs I am going to concentrate on technical analysis.

Important aspects of technical analysis

• Trends
• upward,downward horizontal
• Trend Lengths
• Support and Resistance
• Support: price level through which a stock or market seldom falls
• Resistance: price level a stock seldom surpasse
• Important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level.
• Test and confirm trends and need to be monitored by anyone who uses technical analysis
• Volume
• The number of shares or contracts that trade over a given period of time, usually a day.
• The higher the volume, the more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do.
• Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend.