Definition of stocks technical analysis
Technical analysis is the art of predicting future behavior from the trading history of a stock. The starting point for most technical analysts is to record the past prices and trading volumes for a stock, and to look for identifiable patterns that can be used to predict future prices. A purist may assert that price and volume data are the only information required to make reasonable predictions, but most technical analysts use two other types of information as well: supply and demand indicators, and sentiment indicators.
Supply and demand indicators are intended to reflect pent-up demand or supply of an asset that will be transformed into future trades that will influence the price. Other indicators of pent-up demand include the cash balances of mutual funds and other financial intermediaries and the supply of credit in the economy.
Sentiment indicators attempt to capture the mood of key market participants with a view to forecasting their future activities. Another indicator of market sentiment may be the proportion of all studies done by investment houses that are optimistic about future prospects.
Goal of the technician
The technician has three main objectives. These are to identify trends in share prices, to identify changes in trends, and to project the price limits of newly established trends . The successful will earn improved returns by properly timing the purchases and sale of securities.
Technical versus fundamental analysis
Both the fundamental and the technical analyst feel that they can earn a return superior to that of other market participants by following their particular method. The primary difference between technical and fundamental analysis centers on the data used.
The fundamentalist recommends the purchase of those securities that are undervalued in the market on the presumption that when the market realizes the true value of the stock, the price will move toward its intrinsic value. With respect to the market as a whole, the fundamentalist believes that stock prices are a leading indicator of economic conditions. The superior market analyst must predict future economic conditions far in advance and determine the implications of this forecast for common stock prices.
The pure technical analyst bases purchase and sale decisions only on the data provided by the market itself. In theory, the technician does not care about the state of the economy or even the line of business of a firm under consideration. In practice, most technicians combine both technical and fundamental analysis when setting an investment strategy.
