Definition of Technical Analysis
Technical analysis is the charting of stock trading information used to predict the future trading action of any particular stock or commodity. There are many technical analysis indicators used by investors, including moving averages, relative strength index, bull flags, and resistance and support lines.
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Definition of Technical Analysis
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Technical analysis is the study of relationships between security market indicators. Such relationships may be explained as price levels, trading volume and price movements. These indicators are used to gain insights into the supply and demand of stocks being traded in open markets. Traditionally, market investors and analysts have relied on the analysis of the fundamentals of a company (such as financial statements and reports) for trading decisions. However, that process is cumbersome and involves too much time to analyze a large volume of data.
History of Technical Analysis
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Technical analysis is perhaps the oldest method devised by market participants in their effort to try to beat stock market performance. Its origins go back to the years 1900 and 1902, when Charles H. Dow wrote a series of articles in the "Wall Street Journal." These articles formed the basic concept of technical analysis. However, not much happened as a result of these writings until 1922 and 1932 when contributions were made by Hamilton and Rhea, respectively, and the technical analysis language began appearing in trading language. Technical analysis is now a household word and many investors use its concepts to buy and sell securities.
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What is Technical Analysis Used For?
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Technical analysis is today used as a major analytical tool for investments. Whether you are trading stocks, bonds, indexes, commodities futures, or options and other derivatives, technical analysis can be employed to analyze your potential trading instruments. Information on trading instruments such as stocks are compiled and plotted on charts. Over time, trends begin to emerge on these charts. These occurrences have been observed to lead to similar outcome each time they manifest. Some examples of technical analysis indicators include moving averages, bull flags, support and resistance lines, relative strength index and others. The moving average is the cumulative average of stock's closing prices for the desired number of days. The bull flags are made of of two parallel lines with a base line completing the flag formation. It is a break out signal which points to a market's change in direction. Support and resistance lines are price areas on the chart where the market decline or advance fails to penetrate such levels. The relative strength index is an indicator which measures the strength and momentum of any trading asset.
How Reliable are Technical Assistance Analysis Indicators?
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Many users of technical analysis believe that such research methods for analyzing stocks and other commodities is very efficient. Once a trader understands how to apply the concept of technical analysis, it is very difficult to abandon such analytical methods for other techniques such as traditional analysis. In fact, both technical analysis and traditional analysis could be employed hand in hand to confirm received signals for trading. The major advantage of technical analysis is that one could examine the entire trading life of a stock or the entire trading activity of any company in under 10 to 15 minutes.
Warning
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Technical analysis is an inexact science. It may yield critically valuable and timely information for its users. However, any one using such indicators must also be warned that it is not a fail-proof system. At times, the information derived from technical analysis may or may not hold true in the market. Users are advised to always be prepared to use other means, such as sell or buy stops, to protect their portfolios from unanticipated outcomes.
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