Technical Analysis-Finance Technical Analysis: Proper

Technical Analysis-Finance Technical Analysis: proper evaluation technique of the worth of a security is what could at least give an indication if not answers to questions whether a security is to be bought today or what is likely to be its prices in a definite period from today. Technical analysis is one of the solutions aimed at providing this. A simple and basic approach has been given a name that sounds complicated. In simple terms technical analysis is the study of prices using charts as the primary tool.

In 1900 Charles Dow laid the foundation for the present day technical analysis with what is known as the Dow Theory. Arising either directly or indirectly from the Dow Theory, come the principles as the prices which shows the trends existing, prices discounting all known knowledge, divergence and confirmation, volume performing changes and support and resistance. The popular Dow Jones Industrial Average is also a direct outcome of the Dow Theory.

So we can see that the contribution of Charles Dow is important and the concentration of his theories on the basics of security price movement gave rise to a totally concept in the analysis of markets in the form of Technical analysis. Technical analysis may therefore be defined as a method to forecast price movements and market trends by analyzing charts of the past market action, which considers the account price of instruments, volume of trading and should it be applicable, the open interest in the instruments.

In technical analysis the emphasis is on making use of the past stock price and volume to forecast future price movements. There is also the attempt in technical analysis to time the markets. The theory behind technical analysis is that the market price of a security at any given specific period in time is a reflection of all available factors affecting supply and demand of the particular market. Hence technical analysis concentrates on the study of the market prices themselves rather than an evaluation of those factors directly.

This method requires a detailed study of, besides other things the actual daily, weekly and monthly price changes and is expected to give the most effective means to capitalize on the future direction of price movements. These strategies most often use a set of mathematical measurements and calculations to keep track of the market activity. Buy and sell decisions are then made on the basis of the output generated by the charts, manual calculations, computers or all of them put together.

An advantage in using the bar chart in technical analysis is that information like the high, low, open and close of any security is available with the use of a bar chart. Another example is the use of the moving average in technical analysis. The moving average is very easy to use and provides information like and it shows the average value of a security over a specific period of time.

Another indicator commonly used is the support and resistance level and is the ceiling at which the price of a security will tend to reverse itself and go down or in other words the highest price a share could reach and beyond which it is not expected to go. There are numerous indicators like this in technical analysis to forecast the prices of a security at a given period in time.

Some of the arguments in favor of technical analysis include the fact that chart patterns could mirror the past performance of a set of investors. As this set of investors is unlikely to change quickly, similar patterns are quite likely to occur in the future too. Still again chart patterns are expected to show the action inherent in an auction market. The reaction to information need not be immediate and so the chart may be able to offer predictive value.

It is also seen that chart happens over and over again, though why this happens is not clear. This offers charts to be of use in predictions. One more factor is that investors can swing from overly enthusiasm to excessive pessimism and technical analysis offers assistance in such a situation.

Some of the disadvantages that may be seen with technical analysis include that though the past and future performance of a stock may be correlated, it need not necessarily mean or imply causality and so technical analysis need not be reliable. Qualitative Analysis: Quantitative analysis is one of the two forms of technical analysis, the other being the use of charts. In quantitative analysis various statistical properties are looked at to assist in finding out the extent to which securities or currencies have been overbought or oversold.

Quantitative analysis thus enables one to assess his holdings and to see if any is in excess of what they should be for necessary action to be taken. Since it is a part of technical analysis it offers all the benefits and at the same time carries with the disadvantages of technical analysis. Quantitative analysis gives ways in which to meet various challenges in business by using data driven analytical services. In the world of today's business the amount of data available for business decisions has become very large.

In spite of this it is often seen that this data is not used properly so as to become a business asset. In such a scenario quantitative analysis provides assistance in the form of advanced statistical analysis to give more information from the data available internally as well as external data sources. Fundamental Analysis: Fundamental analysis is a method that uses the study of the financial data of an issuer to assess the value or worth of a security.

It has a detailed look into the issuers' income, assets and liabilities, management and position in its industry. In short the focus is on the basics of the business. Therefore fundamental analysis may be defined as a method of security valuation, which includes the monitoring of a company's financials and operation, including sales, earnings, and potential for growth, assets, liabilities, management, products and competition.

Fundamental analysis hence is based on factors that are external to the trading market and which could have an impact on the supply and demand of a particular market. In this way it contrasts starkly with technical analysis and in addition is not dependant on the price.

The theory behind this method is that by supervising the relevant supply and demand factors of a particular market it would be possible to identify any state of existing or potential disequilibria of market conditions well in advance of that state having its effect on the price level of that market.

In fundamental analysis the assumption is that markets are imperfect and that information is not immediately understood or spread and that it is possible to construct econometric models to give equilibrium prices, which may indicate whether the prevalent prices are inconsistent with the prevailing economic conditions and so will vary in the future. 10 Technical Analysis vs.

Fundamental Analysis: The main differences seen between the two types of analysis include the fact that technical analysis concentrates on what actually happens in the market, while fundamental analysis focuses on what should happen in a market. The charts in technical analysis are based on market action with regard to price volume and open interest. In contrast the factors that are involved in the price analysis in fundamental analysis are supply and demand, seasonal cycles, weather, and government policy.

So while the fundamentalist studies the cause of likely market movements in contrast the technician concentrates on its effects. So we can see that fundamental and technical analysis are totally different in their approaches to providing a solution of predicting what is likely to happen with a security or equity in a given period in the future. Which is the better method is a question that has not answer still. Proponents of the two methods have been at odds with each other since the start of investing.

At times it may appear that technical analysis should get the vote of confidence, yet in others cases it appears that the fundamental proves better. In spite of these differences over methods an analysis of the success of both of them shows that it might be better to use either depending on situations. An investor looking for long-term investments in companies with solid foundation, growth and income potential will find fundamental analysis as the better solution.

Whereas, an investor searching for companies that are on the just going to be discovered and interested only in short-term investments may find technical analysis the more suitable solution. A long-term investor not too bothered about a company's basics as most often the investor will diversify to minimize risk or a short-term investor waiting for the sentiments of investors to change are the other two categories that are likely to find technical analysis useful. One way of looking at this controversy is not to say vs.

each other but to look at ways and means in which they complement one another. The study of trends is common ground for both technical analysis and fundamental analysis. While technical analysis looks trends in price and volume fundamental analysis focuses on economic and corporate growth trends and the forecast of performance using the trends of relevant factors. The basis of any long-term trend in price and volume for all securities and stocks is rooted in fundamentals. Technical analysis grows on looking at changing supply and demand trends.

When studying trends it would be useful to determine significance of the changes in the underlying perceptions of value that are a consequence of fundamentals and prediction of performance in the future. A balanced knowledge of these two disciplines can give a very good basis for one to have a successful experience in trading. Just as in the case of technical analysis there are several fundamental tools that can be utilized to provide early warnings of trend reversals.

The growth rate prediction of a corporate might be changed as a consequence to an early warning or maybe as a consequence of a sudden or continual drop in industry sales reports. Predictions that are a sequel to the most recent trend and do not go too far into the future can be measured against predictions of a longer term as a ratio that may provide fundamental analysis a better input of the conditions of market valuation. References Acheli, Steven B. Technical Analysis from a to Z. 2004.

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