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Technical analysis, also known as charting, is the study of the trading history (the price and volume over time) of any type of traded security (stocks, commodities, etc.) to attempt to predict future prices.
Technical analysis (studying the price and trading history) stands in contrast to fundamental analysis (studying the actual nature of the stock or commodity in question), although some investors combine the two types of analysis in making investment decisions.
Technical analysis is primarily (but not exclusively) conducted by studying charts of past price and trading action. Many different methods and tools are used in technical analysis, but they all rely on the assumption that price patterns and trends exist in markets, and that they can be identified and exploited.
Technical analysis is not, of course, 100% accurate, but attempts to give results that are, simply, correct more often than they are wrong.
Indeed, the central strategy of many active traders is to trade often, terminating trades that prove to be incorrect decisions and "letting run" trades that prove to be correct decisions.
Technical analysis is viewed by many as more art than science. Indeed, a good proportion of technical and fundamental traders view the other side with derision. Furthermore, within technical analysis, adherents of different technical analyses (say candlestick charting and Dow Theory), often treat each other's approaches with derision.
Some academic studies conclude technical analysis has little, if any, predictive power while other studies show that the practice can produce excess returns. For example, measurable forms of technical analysis, such as non-linear prediction using neural networks, have been shown to occasionally produce statistically significant prediction results.
As an example of the debate regarding the efficacy of technical analysis, Peter Lynch, a very well-known and successful fundamental analyst, once commented, "Charts are great for predicting the past." A Federal Reserve working paper has shown that the statistical properties of intraday foreign exchange prices change near "support and resistance" lines, without showing that this result could be used in a profitable trading strategy.
2006-11-14 22:18:37
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answer #1
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answered by mallimalar_2000 7
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There are essentially two approaches to analysing financial markets. This includes shares, commodities, precious metals, currencies, interest rates, gilts or bonds, and derivatives such as futures, warrants etc. One is the fundamental approach and the other is the technical approach.
In his book, Technical Analysis Explained, Martin Pring, defines technical analysis as follows:
“The technical approach to investment is essentially a reflection of the idea that prices move in trends which are determined by the changing attitudes of investors towards a variety of economic, monetary, political, and psychological forces. The art of technical analysis – for it is an art – is to identify trend changes at an early stage and to maintain an investment posture until the weight of the evidence indicates that the trend has reversed.”
Essentially a technical analyst (also known as a chartist because of the study of price charts) does not concern himself with the basic underlying fundamental reason for the price of a share. This argument is based on the premise that all relevant information from whatever source is already factored into the share price, including fundamental, economic, political and psychological factors and that it is therefore irrelevant and unnecessary to even try to examine any additional fundamental reasons in support of its price.
The technical and cycle analyst’s approach is therefore to ignore the fundamentals and to analyse the actual price graph, looking at volume traded, movement in prices, highs and lows, moving averages, etc. Through the use of technical and cycle analysis, the investor is able to time appropriate entry and exit points.
The basic presupposition to technical analysis is that:
•Markets are efficient; and
•All known facts about a company, including future prospects, are already factored into the share price
In Martin Pring’s book, he says the following; “The major movements in bond, stock and commodity prices are caused by long-term trends in the emotions of the investing public. These emotions reflect the anticipated level and growth rate of future economic activity and the attitude of investors toward that activity.”
Simply stated, markets are anticipatory in nature. Analysts, economists and investors are all forecasting company earnings, future economic activity etc and their conclusions, together with a fair dose of emotion, are the cause of price trends either up or down.
But, overriding this entirely are the business and stock market cycles that have the major influence on the trends of shares and other financial instruments.
From a technical analysis point therefore, the value of a share is not important – what is of importance is the price movements caused by forces of supply and demand and the trend and direction of the predominant force. The conclusion therefore is that the value of the share is simply its market value.
Technical analysis therefore puts foward that while the price action on a share graph is caused by the reaction of investors, both private and institutional and speculators to the underlying fundamentals, one does not need to understand these reasons, in order to invest or trade.
The two dominant technical forces in the stock market game are those of “pattern” and “time”.
The pattern is that the market follows a path. It is either in a path going up i.e. in a bull pattern or phase or in a bear pattern or phase going down.
This pattern then follows a definite time schedule, often based on historical cycles.
Technical analysis is the recording, in one form or another, of the actual history of trading in a particular share (or an index, to reflect a grouping of shares) and then the deduction from that pictured history of the probable future trend.
To a large degree, technical analysis is at its ultimate, the study of prices as distinct from values.
Technical and cycle analysis has really come into its own with the advent of computers, which can perform quick and multiple calculations on vast quantities of price and volume data, over any period of time.
Technical analysis probably had its origins with Charles Dow, the editor of the Wall Street Journal, at the turn of the century. He published a series of editorials, which were later formalised into a set of principles, known as Dow Theory. The basic rules to his theory were that:
•The averages discount everything;
•The market has three movements, the primary movement (i.e. a primary bull or bear market lasting), secondary or intermediate reactions lasting 3 weeks to 3 months, and minor movements lasting from hours up to 3 weeks.
•Volume must confirm the trend; i.e. volume should expand on rallies and contract on declines.
•A trend remains in effect until it changes.
2006-11-14 22:39:28
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answer #3
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answered by Ni Ten Ichi Ryu 4
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Technical analysis is the forecasting of market prices by means of analysis of data generated by the process of trading.
Technical analysis relies on the assumption that markets discount everything except information generated by market action, ergo, all you need is data generated by market action.
Technical analysts believe that:
* The balance of supply and demand, or market action, is the root of price setting.
* A thing is worth what it can be sold for.
* "The Averages Discount Everything" (one of the principles of Dow Theory).
* All hopes, fears and knowledge, including reasonable expectation, is discounted or incorporated in the current price.
* Studying the price is all that is necessary.
Technical Analysis: Conclusion
* There is evidence in support of the usefulness of moving averages, momentum, support and resistance and some patterns; but no convincing evidence in support of Gann Theory or Elliott Wave Theory.
* Technical analysis works best on currency markets, intermediate on futures markets, and worst on stock markets.
* Chart patterns work better on stock markets than currency markets.
* Nonlinear methods work best overall.
* Technical analysis doesn't work as well as it used to.
"Technical analysis is perhaps the oldest device designed to beat the market. It has secular history given that irs origins can be traced to the seminal articles published by Charles H. Dow in the Wall Street Journal between 1900 and 1902, and its basic concepts became popular after contributions by Hamilton (1922) and Rhea (1932). A complete jargon of words and pictures has been developed since then and many traders, nowadays, take their buying and selling decisions on the basis of technical analysis results appearing on their screen."
Cesari and Cremonini (2003)
[number in square brackets indicates number of Google results]
1925 SCHULTZ, Henry, Forecasting Security Prices, Journal of the American Statistical Association, Volume 20, Issue 150 (Jun., 1925), 244-249. [2]
1932 KING, Willford I., Forecasting Methods Successfully Used Since 1928, Journal of the American Statistical Association, Volume 27, Issue 179 (Sep., 1932), 315-319. [2]
1933 COWLES, Alfred 3rd, Can Stock Market Forecasters Forecast?, Econometrica, Volume 1, Issue 3 (Jul., 1933), 309-324. [about 151]
Cowles (1933) found that stock market forecasters cannot forecast.
1934 KING, Willford I., Technical Methods of Forecasting Stock Prices, Journal of the American Statistical Association, Volume 29, Issue 187 (Sep., 1934), 323-325. [2]
1952 GORDON, R. A., Wesley Mitchell and the Study of Business Cycles, Journal of Business of the University of Chicago, Volume 25, Issue 2 (Apr., 1952), 101-107. [3]
1955 ROOS, Charles F., Survey of Economic Forecasting Techniques: A Survey Article, Econometrica, Volume 23, Issue 4 (Oct., 1955), 363-395. [3]
1959 ROBERTS, Harry V., Stock-Market "Patterns" and Financial Analysis: Methodological Suggestions, Journal of Finance, Volume 14, Issue 1 (Mar., 1959), 1-10. [about 58]
Roberts (1959) suggests that, "There is every reason to believe, however, that this methos of looking at the tape will facilitate all that takes place afterward."
1963 WEINTRAUB, Robert E., On Speculative Prices and Random Walks A Denial Journal of Finance, Volume 18, Issue 1 (Mar., 1963), 59-66. [about 8]
1963 ZARNOWITZ, Victor, On the Dating of Business Cycles, Journal of Business, Volume 36, Issue 2 (Apr., 1963), 179-199. [about 11]
1964 ALEXANDER, Sidney S., Price Movements in Speculative Markets: Trends or Random Walks, 1964. [about 101]
Alexander (1964) concludes with, "The findings surveyed in this paper can be summarized by the statement that in speculative markets price changes appear to follow a random walk over time, but a move, once initiated, tends to persist. In particular, if the stock markets has moved up x per cent it is likely to move up more than x per cent further before it moves down by x per cent."
1965 ATKINSON, Sue N., Financial Flows in Recent Business Cycles, Journal of Finance, Volume 20, Issue 1 (Mar., 1965), 14-35. [3]
1965 FAMA, Eugene F., The Behavior of Stock-Market Prices, Journal of Business, Volume 38, Issue 1 (Jan., 1965), 34-105. [about 587]
Fama (1965) concludes that, "chart reading, though perhaps an interesting pastime, is of no real value to the stock market investor."
1966 FAMA, Eugene F. and Marshall E. BLUME, Filter Rules and Stock-Market Trading, Journal of Business, Volume 39, Issue 1, Part2: Supplement on Security Pricing (Jan., 1966), 226-241. [about 155]
1967 LEVY, Robert A., Relative Strength as a Criterion for Investment Selection, Journal of Finance, Volume 22, Issue 4 (Dec., 1967), 595-610. [about 29]
Levy (1967) concludes with, "Although it appears that superior profits can be achieved by investing in securities which historically have been relatively strong in price movement, the random walk hypothesis is not thereby refuted. To the extent that the superior profits are attributable to the incurrence of extraordinary risk, [...]"
1968 HOWREY, E. Philip, A Spectrum Analysis of the Long-Swing Hypothesis, International Economic Review, Volume 9, Issue 2 (Jun., 1968), 228-252. [about 7]
1968 JAMES, F. E., Jr., Monthly Moving Averages--An Effective Investment Tool?, Journal of Financial and Quantitative Analysis, Volume 3, Issue 3, Special Issue: Random Walk Hypothesis (Sep., 1968), 315-326. [about 10]
1969 MELNIK, Arie and Alan KRAUS, Short-Run Interest Rate Cycles in the U.S.: 1954-1967, Journal of Financial Quantitative Analysis, Volume 4, Issue 3 (Sep., 1969), 291-299. [3]
Why is technical analysis so popular?
'Magical thinking' and technical analysis
Tvede p162
TA *is* representiveness
Representativeness is a cognitive heuristic in which decisions are made based on how representative a given individual case appears to be independent of other information about its actual likelihood.
"people often predict future uncertain events by taking a short history of data and asking what broader picture this history is representative of."
Shleifer [book] page 11
Communal Reinforcement
Communal reinforcement is the process by which a claim becomes a strong belief through repeated assertion by members of a community. The process is independent of whether or not the claim has been properly researched or is supported by empirical data significant enough to warrant belief by reasonable people.
Selective Thinking
Selective thinking is the process whereby one selects out favorable evidence for remembrance and focus, while ignoring unfavorable evidence for a hypothesis. 'The moon was full and nothing happened,' may be accurate but it is not a very interesting headline.
Confirmation Bias
Confirmation bias refers to a type of selective thinking whereby one tends to notice and to look for what confirms one's beliefs, and to ignore, not look for, or undervalue the relevance of what contradicts one's beliefs.
Self-deception
Self-deception is the process or fact of misleading ourselves to accept as true or valid what is false or invalid. Self-deception, in short, is a way we justify false beliefs to ourselves.
Why is technical analysis so popular?
'Magical thinking' and technical analysis
Tvede p162
TA *is* representiveness
Representativeness is a cognitive heuristic in which decisions are made based on how representative a given individual case appears to be independent of other information about its actual likelihood.
"people often predict future uncertain events by taking a short history of data and asking what broader picture this history is representative of."
Shleifer [book] page 11
Communal Reinforcement
Communal reinforcement is the process by which a claim becomes a strong belief through repeated assertion by members of a community. The process is independent of whether or not the claim has been properly researched or is supported by empirical data significant enough to warrant belief by reasonable people.
Selective Thinking
Selective thinking is the process whereby one selects out favorable evidence for remembrance and focus, while ignoring unfavorable evidence for a hypothesis. 'The moon was full and nothing happened,' may be accurate but it is not a very interesting headline.
Confirmation Bias
Confirmation bias refers to a type of selective thinking whereby one tends to notice and to look for what confirms one's beliefs, and to ignore, not look for, or undervalue the relevance of what contradicts one's beliefs.
Self-deception
Self-deception is the process or fact of misleading ourselves to accept as true or valid what is false or invalid. Self-deception, in short, is a way we justify false beliefs to ourselves.
2006-11-14 22:28:27
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answer #6
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answered by Anonymous
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