Trading Academy

Technical Analysis

There are two main streams of thought when it comes to analysis of potential stocks to purchase. These are fundamental and technical analysis. Fundamental analysis is heavily used by traditional stockbrokers and fund managers, and involves an assessment made on a company’s operations and their likely future financial performance.

Technical analysis assumes that all the factors that influence the price of a security have already been factored into the price. This is why technical analysts never concern themselves with why prices go up or down, and one of the reasons why often the price will be a leading indicator of published information. Read more about the assumptions behind technical analysis.

Also, as a background to modern day technical analysis, read about Charles Dow. Dow (1851 – 1902) was an American journalist who co-founded Dow Jones & Company and The Wall Street Journal, which became the most respected financial publication in the world.

Then after that, you can read about Dow Theory. Dow Theory is the composite work of Charles Dow, William Hamilton, and Robert Rhea. Dow Theory was based on analysing the general swings in the market, with the aim of identifying the general trends. A lot of this work underpins modern technical analysis studies.

Technical analysis is the study of actual movements in the price of the stock. Normally this is done using charts, which graphically depicts the price (Y-axis) over time (X-axis).

Despite what people may otherwise tell you or any preconceived ideas you may have, there are only two things that move stock prices. They are supply and demand – nothing more and nothing less.

If there is more demand than supply for a stock, then the price shall rise. Conversely, if there is more supply than demand for something, then the price shall fall. This is absolutely true in any equities market.

What causes the demand and supply for a particular company at any one time could be discussed for hours. Is it profit statements? Is it dividend payments? Is it a fancy logo with a dazzling advertising campaign? No one can be absolutely sure at any point why people may be buying and selling shares. Herein lays the beauty of technical analysis.

At no time does technical analysis attempt to determine why there might be supply and demand, only that there are certain levels of supply and demand. By studying actual movements in the share price, we can go a long way to determining what the present demand and supply for that share is and therefore performing analysis on its potential for reward.

For a technical analyst, it is assumed that all fundamental and economic influences on a share price are already taken into consideration in the market, so they simply monitor the price action. Many technical analysts go as far as suggesting that fundamentals are not important and are not worth considering at all.

The strength in technical analysis is that you are buying and selling the share price, not profit statements or performance ratios like the P/E ratio or return on equity figures. The key advantage of using technical analysis is that it is the price that ultimately determines whether you make money or not. Most importantly, what you think the price should be has NO influence whatsoever on the price.

In this technical analysis section, we are going to learn the following:

One thing I should add is that traders have been using technical analysis for many years. This is nothing new. There are hundreds of technical indicators, scores of candlestick formations, so many charts patterns and the list goes on. So many texts, books, courses, articles etc have been written on so many different parts of technical analysis that I simply cannot cover everything here.