Wednesday, 8 January 2020

Unit 6: Technical Analysis

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Unit 6: Technical Analysis

The term technical analysis is used to mean a fairly wide range of techniques; all based on the concept that past information on prices and trading volume of stocks gives the enlightened investor a picture of what lies ahead.

It attempts to explain and forecast changes in security prices by studying only the market data rather than information about a company or its prospects, as is done by fundamental analyst.

Fundamentalists make their decisions on quality, value and depending on their specific investment goals, the yield or growth potential of the security.

They are concerned with the basis, the corporation's financial strength, record of growth in sales and earnings, profitability, the investment acceptance and so on.

They also take into account the general business and market conditions.

Finally, they interpret these data inductively to determine the current value of the stock and then to project its future price.

Fundamentalists are patient and seldom expect meaningful profits in less than one year.

Some critics see technical analysis as a form of black magic.

One should not be surprised to see them question the validity of the discipline to the point where they mock its supporters.

In fact, technical analysis has only recently begun to enjoy some mainstream credibility.

While most analysts on Wall Street focus on the fundamental side, just about any major brokerage now employs technical analysts as well.

The technician must (1) identify the trend, (2) recognize when one trend comes to an end and prices set off in the opposite direction.

His central problem is to distinguish between reversals within a trend and real changes in the trend itself.

This problem of sorting out price changes is critical since prices do not change in a smooth, uninterrupted fashion.

The two variables concerning groups of stocks or individual stocks are: Behaviour of prices, and Volume of trading contributing to and influenced by changing prices.

One school of thought led by William L. Jiler developed a comprehensive technique called "Chart Reading".

Charts provide visual assistance detecting the emerging and changing patterns and changing patterns of price behaviour.

Technical analysts use three basic types of charts.

These are Line Charts, Bar Charts, Point and Figure Charts.

The trouble with most chart patterns is that they cause their followers to change their opinion very frequently.

Most chart services change like the wind.

One day they put out a strong buy signal, two weeks later, they see a change in the pattern and tell their clients to sell, then two weeks later, they tell them to buy again.

The result is that these patterns force their followers in and out of the market time and time again.

This might be great for brokers' commission, but not so great for the investor.

Most of the technical indicators make sense when examined individually but when one examines many technical indicators simultaneously, the interpretation of their collective meaning is often contradictory and confusing.

Confidence Index: It is the ratio of a group of lower-grade bonds to a group of higher-grade bonds.

Indicators: Indicators are calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum.

Odd Lots: Stock transactions of less than, close to 100 shares.

Trend line: A charting technique that adds a line to a chart to represent the trend in the market or a stock.

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