Technical Stock Analysis

Technical analysis uses price and volume information to forecast stock prices. Technical analysis is complimentary to fundamental analysis which uses accounting and macro economic data to forecast stock prices. Technical analysis manipulates price and technical data to form moving averages, stochastic indicators, and price patterns to aid their research. Technical analysis is not concerned with reasons for price change only with capturing the beginning and end of the trend.

Difference Between Fundamental and Technical Analysis

Fundamental research believes that by studying the causes and effects of different social, economic, and business changes stock prices can be determined. Technical analysis declares that while such research is useful the possible misinterpretation of such events, the weighting of each event, and the possible oversight of macro events makes fundamental analysis a flawed enterprise. Rather it is better to simply measure the strength and direction of a trend through price and volume action.

Technical Analysis and Moving Averages

Technical analysis begins with the measurement of trends. Trends can be measured by minutes, days or weeks. The longer the trend the greater the strength of the trend. Trends are measured by moving averages, the computation of trends by taking the most recent data each data and computing the average price. For example traders would compute a 200 day moving average by taking the most recent closing prices of the past two hundred days and averaging them. Traders buy when the current price is greater than the moving average and sell when the price falls below the moving average. Traders also trade two moving averages using the shorter average as the buy and sell signal when as exceeds or falls below the longer average.

Technical Analysis and Indicators

Technical analysis uses indicators to determine the start and end of trends. Indicators are formed in many ways such as comparing two moving averages or comparing the amount of up volume to down volume. The effectiveness of an indicator is a function of the time lag created by moving averages. Short time lags create many trade entries and exits. Long lags are slow to capture the beginning and ending of a trend.

Technical Analysis and Volume

Volume is measured much like price. Volume is used to indicate the strength and confirm the existence of a trend. Technical traders put much more confidence when prices begin to trend and volume accompanies the change of sentiment. The end of a trend is often measured by volume when prices decline but volume increases.

Trading with Technical Analysis Tools

At the beginning of any trade using technical analysis the trader must choose a time frame in which to operate. Fundamental analysis is a long term process only. It cannot be used for short term plays. Technical analysis can be used, depending on the time values chosen for creating moving averages, chart patterns, or volume studies for short, intermediate, and long term trends. However, the technical trader must be certain that trading tools are appropriate to the time horizon of the trader.

References

• Technical Analysis Definition

Resources

• Fundamental Trading Theory