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Basics of Technical Analysis

Technical analysis

What is Technical Analysis?
(based on www.topstockresearch.com)

Technical analysis is a study of historical price and volume of the stock to predict its future behavior. Technical analyst study these price movement and identify formation of patterns that are formed repeatedly and the behavior of price after formation of patterns. If probability of price movement after these pattern, in certain direction, is very high then, analyst can bet on the buying or selling of the stock.

Technical Analyst have identified hundred of different pattern, indicators, oscillators, theories etc and have well documented them for benefit of mass.
One of the example of such pattern is double top. It tells that after formation of the pattern, the chances of share price falling is very high.

Based on these studies, analyst in the past have identified certain repeatable patterns on probability of predicting future price movement of a share. Technical analyst heavily rely on charts and generally have very advanced software tool to analyze the data.

Technical analysis though are very common in stocks but can be used in lot of other financial instruments as they are also are affected by similar market forces as in stocks.
Basic principles of Technical analysis Technical Analysis is based on these three principles:

Price Discounts Everything: Technical analyst believe in efficient-market hypothesis (EMH). This means the current value of the stock, is fair value of the stock and has correctly factored in all the information that could affect the price of the stock at any given point of time.

Price Moves in Trends: Technical analyst believes that share price moves in trends whether upward or downward or sideways. And they will continue to do so in future. They go by this assumption to trade in stocks.

History Repeats Itself: Technical analyst believe that market movement in a certain situation would be similar to its movement in the past. Or Investors in certain scenario, even though they are irrational, will behave in similar way as they behaved in past. This typical movement are studied by analyst and are used to take advantage in trading stocks for a given situation.
Charts in Technical Analysis: Charts are very important tool used by technical analyst. Commonly used charts are:
1. Line Chart.
2. Bar Charts.
3. Candlestick Charts.
Technical Indicators/Oscillators

Technical indicators are derived from Volume of stocks using certain formula, and are usually displayed together with price chart, to provide analyst a different perspective. Some of the formula are very simple while other are complex but most of the tools/website like www.topstockresearch.com, provide them free of cost so individual investors don't have to dive down to calculate them.


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