What exactly does technical analysis consist of?

Question

relating to the stock market.....

Answer 1

There are two basic types of analysis you conduct when considering buying stock.

The first is fundamental, which is examining the company's balance sheet, sales, income, debt, and so on. This is what most fund managers, MBA graduates, accounts, and investment bankers do. In general, fundamental analysis works longer term (in years), as long as the fundamentals don't change. The style of investing that best fits with fundamental analysis is value investing, as exemplified by Warren Buffet and Peter Lynch (some will tell you Peter Lynch's style flipped from value to growth and back again, but they're wrong - read his books). The theory behind fundamental analysis is solid, it has been shown to work, and almost every stock and investment professional agrees that fundamental analysis, over the long run, works.

The second type of analysis is technical analysis. This basically means looking at the price and volume of the stock on charts (while ignoring the company's fundamentals), and other technical indicators (like P/E ratio, Relative Strength, Stochastics, etc.) that are directly calculated from price and volume. This is what hedge funds (well, most of them), short-term traders like day traders, trend followers (like the Turtles), market timers, and CANSLIM investors mainly focus on. The investing style that best fits technical analysis is growth investing (although not perfectly). This approach doesn't have any extremely famous people associated with it, but if you research a little, you'll find people like Jesse Livermore, Nicolas Darvas, William O'Neill, and Dan Zanger, who swear by technical analysis, and have consistently made millions using it. The theory behind technical analysis seems solid but hasn't been completely proven according to most finance professors, but in practice it has been shown to work.

A simple example of technical analysis is this: stocks above the 50-day moving average (the average price of the last 50 days) tends to stay above it, and stocks below the 50-day moving average tend to stay below it. Technical analysis is not perfect, but this simple example by itself works up to 80% of the time, depending on what kind of market (bull or bear) it is.

Technical analysis, in a nutshell, means staring at stock charts to find patterns.

Most fund managers and finance professors argue that one type of analysis is superior to the other, but the best realize that the two must be combined to maximize returns and minimize risk. For example, there were lots of great companies with great earnings at the beginning of 2001, but then the Internet bubble popped, lowering the stock prices of even great companies by 30-50%. Although many of these stocks have recovered since, technical analysis would have told you to sell out during the bear market, and stay out until the end of 2003, when the latest bull market began. You could have avoided the losses of 2001 and 2002 that way.

There are numerous books that teach basic, intermediate, and advanced technical analysis, but unless you're going to become a full-time investor, there's just too much conflicting information out there to know what to do with it. I would suggest CANSLIM and www.ibd.com (Investor's Business Daily, the associated online newspaper), which cover both fundamental and technical analysis in relatively simple and unambiguous terms. CANSLIM has been shown to work for at least the past 40 years, since William O'Neill discovered it.

Answer 2

Many books that I have read refute technical analysis as a waste of time.
From my understanding, technical analysis has little to do with the strength of a company. Technical Analysis makes claims that you can make money and not really know anything other than a companies stats. It basically involves just tracking the company's stock price over the last few years. You just look at the graphs and use a bunch of technical indicators that are supposed to be able to predict the company's future stock price.

Answer 3

Valuation of any tradable entity depends on the economic factor. However, in speculative trading the change of prices is because of the demand and supply. And this demand and supply change continuously, even when the fundamentals remain constant. The study and analysis of this continuously changing price action is technical analysis. The technical analysis is done using various tools. These are as follows:

1) Technical Indicators:
There are various technical indicators which are used to determine the market trend, entry and exit points, support and resistance levels. You may read about most commonly used technical indicators at http://www.forexabode.com/technical-analysis/indicators/. Some of the common indicators are MACD, moving averages, Ichimoku cloud, Fibonacci retracements, average directional index etc.

2) Trend lines.

3) Common chart patterns like double and triple tops, double and triple bottoms, head & shoulders, ascending and descending triangles etc.

4) Pivot points.

5) Pure price-action considering the historical resistances and supports.

While using technical analysis, it is always advisable to keep an eye on the major economic releases also because a major economic release can shake the markets in very unexpected ways.

Answer 4

There are two main types of analysis in the trading world. "Fundamental analysis" or something along those lines, you can looks at the financial history of a stock and basically calculates its value. In theory the price of a stock should equal the sum of its future dividends. Because some stocks rarely pay dividends, if any at all, many investors are looking for capital gains and that is their reason for investing. Technical analysis is a process of predicting the movement of the stock based on the behaviour of investors. Emotion is predictable, and some argue that emotion drives fluctuations in the markets, therefor if you can predict the emotions of investors, you can predict the movements of a stock. Some even argue that there are patterns in the charts of stocks, which give future indication to that stock's behavior. Basically, technical analysis is much like economic theory, where forces of supply and demand drive the market.

Answer 5

I'll tell you this: When I first started investing I stuck to fundamental analysis only, I really made little money. Perhaps I was not great at analyzing businesses and the economy. Gradually I moved to both technical analysis and fundamental analysis together. This is William O'neil's approach. A previous reader said that technical is his primary. That is false. His approach is strong in both but definately a growth investing approach. Well, I don't really use his methods much except a few. I now am primarily a technician (one who uses technical analysis). I average upwards of 50% return in my counts and often go over 80% to100% yearly via primarily trading technicals.

But one really has to find the way of investing / trading that works for them. Warren Buffett is known as the best investor of all time. He doesn't use technicals as far as I know. So, I am not saying technicals is the best, I'm saying it has worked better for me than fundamentals. Perhaps because I am talented at reading it.

What do I try to get out of technicals? I try to get a psychologic imprint on the stock. I am also trying to discern if 'smart' money, or institutional investors are moving in, even if the earnings, or news looks bad. I am also trying to find stocks that look washed out (can't go any lower). The selling has grown tired for these typs of stocks, before they rise again. I also try to put most of my money in uptrends, not downtrends. That usually means that institutions are driving it, and that solid fundamentals lie underneath. I can't tell you how many times I bought with good technicals with only doing surface level fundamentals only to see great earnings or news come out later and the stock starts jamming. That is because those in the know such as institutions, who send smart people to business to get first hand look-sees, generally learn something before you and I.

I cover technical analysis as well as some fundamental topics on my blog: gmoolah.blogspot.com. Right now, since we are in a commodity bull market, I cover mostly commodity stocks with a few others thrown in.

Answer 6

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Answer 8

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Answer 9

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Answer 10

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